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By  ARTHUR  TWINING  HADLEY 


Railroad  Transportation,   Its   History  and   Its 

Laws.     12°,  pp.  iv.  +  269      .        ,        .    f  I  50 

"  Prof.  Hadley's  treatise  is  no  less  timely  than  it  is  valuable. 
.  .  Taken  as  a  whole,  the  work  is  the  result  of  an  investiga- 
tion no  less  wide  than  exhaustive,  and  one  possible  only  to  a 
thoroughly  equipped  man,  familiar  with  many  modem  languages." 
—The  Nation. 

"  Every  page  of  the  work  bears  witness  to  the  thorough 
knowledge  of  the  writer  on  the  subject,  and  to  his  equal  ability 
and  practical  sound  sense  in  its  discussion." — Literary  World. 

Economics.  An  Account  of  the  Relations  between 
Private  Welfare  and  Public  Property.  8°,  gilt 
tops «^/  $2  50 

"  No  higher  compliment  can  be  paid  this  work  than  to  say  that 
it  is  hard  to  determine  whether  the  epithet '  judicial '  or  '  judicious  ' 
would  more  appropriately  characterize  it.  .  .  .  It  will  not  only 
be  found  invaluable  by  readers  at  large,  but  will  also  at  once  com- 
mand the  attention  and  admiration  of  economists  the  world  over." 
— Nation. 

"  This  work  will  be  the  standard  text-book  on  political  economy 
in  America.  .  .  .  T'lo  book  will  perform  a  great  service  to  the 
whole  community  by  clarifying  thought  on  economic  questions, 
and  we  hope  to  see  it  adopted  :  -j  a  text-book  in  every  American 
university." — A^.  Y.  Commercial  Advertiser. 


G.  P.  PUTNAM'S  SONS,  new  york  and  London 


ECONOMICS 

AN   ACCOUNT   OF   THE   RELATIONS   BETWEEN 
PRIVATE  PROPERTY  AND  PUBLIC  WELFARE 


BY 


ARTHUR  TWINING  H^ADLEY 

Preudent  of  Yale  University ;  sometime  Labor  Commissioner  of  the  State 

of  Connecticut ;  Author  of  "  Railroad  Transportation, 

its  History  and  its  Laws  " 


eii) 


G.  P.  PUTNAM'S  SONS 

NEW  YORK  LONDON 

27  WEST  TWENTY-THIRD  STREET  24  BEDFORD  STREET,  STRAND 

S^t  Jnicktrbodwr  ^rtsa 
1904 


ComuGHT,  1896    ■ 

BY 

G.  p.  PUTNAM'S  SONS 
Entered  at  Stationers'  Hall,  London 

Set  up  and  electrotyped,  April,  1896.  Reprinted,  July,  1896 ;  Jan.,  1897  ;  Oct,,  1897 ; 
July,  189B;  Sept.,  1899;  Dec,  1899:  Aug.,  2900;  Aug.,  1901;  Nov.,  1901;  Aug.,  Z90t; 
If  ay,  1903;  Not.,  2903. 


in>e  Itniclierboclier  prcee,  t<cit  Vorl 


PREFACE, 


This  book  is  an  attempt  to  apply  the  methods  of 
modern  science  to  the  problems  of  modern  business. 

Within  the  last  thirty  years  there  have  been  important 
changes  in  economic  theory.  One  school  of  investigators 
has  employed  the  principle  of  natural  selection  to  explain 
the  development  and  present  shape  of  industrial  ideas  and 
institutions.  Another  school  has  used  some  of  the  results 
of  recent  psychological  study  to  account  for  the  actions 
of  individual  men  in  pursuing  their  own  interests  under 
the  ideas  and  institutions  thus  developed.  Both  these 
things  have  combined  to  make  the  economic  science  of 
the  present  day  very  different,  in  its  methods  of  analysis 
and  powers  of  explanation,  from  that  which  formed  the 
basis  of  John  Stuart  Mill's  Principles  of  Political  Economy. 

Meantime  new  problems  have  been  developing  in  modern 
business  life  ;  most  conspicuously,  perhaps,  in  connection 
with  large  investments  of  capital  in  factories  and  railroads. 
The  time  which  elapses  between  the  rendering  of  labor 
and  the  utilization  of  the  products  of  labor  is  now  so  long 
that  the  work  of  the  speculator  has  far  greater  importance 
than  it  did  a  generation  ago.  The  size  of  the  units  of 
capital  is  so  large  that  free  competition  often  becomes  an 
impossibility,  and  theories  of  economics  which  are  based 
upon  the  existence  of  such  competition  prove  blind  guides 
in  dealing  with  modern  price  movements.  We  have  to 
study,  far  more  closely  than  we  once  did,  the  effect  of 
combinations  upon  the  interests  of  the  consumers  on  the 
one  hand  and  the  laborers  on  the  other;  to  examine  the 


IV  ECONOMICS. 

results  of  meeting  organizations  of  capital  with  organiza- 
tions of  labor,  and  of  controlling  them  by  special  legisla- 
tion or  by  direct  government  ownership.  We  have  to 
deal  with  socialism,  not  as  the  theory  of  a  few  visionaries 
who  try  to  destroy  property  rights,  but  as  a  series  of 
practical  measures  urged  by  a  large  and  influential  body 
of  men  who  are  engaged  in  extending  the  functions  of 
government. 

There  is  no  general  work  in  the  English  language  which 
deals  at  all  comprehensively  with  these  problems  of  modern 
economics.  As  long  as  Marshall's  book  remains  incom- 
plete there  is  nothing  which  attempts  to  do  for  the  readers 
of  to-day  that  which  Mill  did  with  such  signal  success  for 
those  of  half  a  century  ago.  The  field  thus  left  open  I 
have  tried  to  cover  to  the  best  of  my  ability  in  the  book 
now  offered  to  the  public.  It  is  written  for  students — that 
is,  for  those  readers  who  are  willing  to  give  the  time  and 
trouble  necessary  for  understanding  subjects  which  are  at 
once  important  and  perplexing.  In  a  professional  ex- 
perience which  has  been  about  equally  divided  between 
the  editorial  room  and  the  lecture  room,  I  have  generally 
found  that,  barring  certain  necessary  differences  in  form 
of  presentation,  what  is  good  teaching  in  one  place  is 
good  in  another.  I  have  attempted  to  make  the  book 
available  for  students  in  the  broad  sense  of  the  term  as 
well  as  in  the  narrow  sense  ;  for  those  who  are  engaged 
in  doing  the  world's  work  as  well  as  for  those  who  are 
preparing  themselves  to  do  it. 

I  have  put  things  as  plainly  as  I  could  ;  but  there  are 
some  parts  of  economics  where  no  amount  of  effort  by 
an  author  will  relieve  the  reader  of  the  necessity  of  do- 
ing independent  thinking  on  his  own  account.  There 
are  many  problems  of  business  life  which  are  so  compli- 
cated in  reality  that  it  is  unwise  to  treat  them  as  if  they 
were  simple.  There  is  no  foundation  for  the  popular  be- 
lief that  questions  of  money,  of  the  tariff,  or  of  the  rela- 


PREFACE.  V 

tions  between  labor  and  capital,  are  easy  to  understand  if 
properly  presented.  The  simplicity  obtained  by  looking 
at  them  from  one  side  only  is  apt  to  be  secured  at  the  ex- 
pense of  thoroughness  and  too  often  of  candor. 

Dealing  as  the  book  does  with  matters  of  active  contro- 
versy, sometimes  clouded  by  party  loyalty  or  by  personal 
interests,  I  am  far  from  expecting  everyone  to  agree  with 
its  conclusions.  But  I  trust  that  everyone  will  recognize 
my  intent  to  state  both  sides  of  disputed  questions  as 
clearly  as  possible,  and  to  treat  the  controversies  as  an 
arbiter  rather  than  as  an  advocate,  even  in  those  cases 
where  the  arguments  on  one  side  have  seemed  decidedly 
stronger  than  those  on  the  other. 

Where  these  controversies  involve  important  differences 
of  legislative  or  commercial  policy,  the  arguments  have 
been  presented  in  the  text  of  the  book  ;  where  they  in- 
volve differences  of  explanation  or  theory  rather  than  of 
practice,  they  have  been  outlined  in  the  foot-notes.  These 
notes  are  not  to  be  regarded  as  exhaustive  discussions  of 
economic  theory,  but  as  summaries  of  opinion  on  contro- 
verted points,  which  may  serve  to  pave  the  way  for 
detailed  study  on  the  part  of  those  who  are  interested 
to  pursue  the  subject  farther  than  the  limits  of  the  pres- 
ent book  will  allow. 

Without  going  into  the  more  complicated  details  of 
modern  mathematical  economics,  I  have  occasionally 
employed  diagrams  in  cases  where  they  seemed  neces- 
sary for  a  thorough  explanation  of  the  subject.  For 
most  people  who  are  likely  to  use  this  book  I  am  con- 
fident that  time  spent  in  studying  the  diagrams  will  be 
more  than  repaid.  I  have  used  one  of  Cournot's  methods 
of  presentation,  not  because  it  is  any  better  than  those 
employed  by  his  successors,  but  because  it  is  simpler. 

The  separation  which  is  made  in  so  many  modern 
books  between  economic  theory  and  economic  practice 
seems  to  me  a  mistake.     I  have  tried  to  keep  theory  and 


VI  ECONOMICS. 

application  together ;  and,  just  as  far  as  possible,  to  make 
the  study  of  practical  problems  a  means  of  developing 
and  explaining  scientific  theories.  Where  this  method 
can  be  employed  it  gives  increased  interest  to  the  study 
of  economics;  and, what  is  still  more  important,  it  guards 
us  in  some  measure  against  the  danger  of  disproportion- 
ate and  one-sided  deductions  from  certain  parts  of  eco- 
nomic science,  to  which  the  student  is  always  liable  if  he 
develops  his  theory  first  and  makes  its  practical  applica- 
tions afterward.  No  writer  on  economics  has  had  as  wide 
an  influence  as  Adam  Smith  ;  and  while  Smith's  power 
was  in  large  measure  due  to  those  personal  qualities  in 
which  he  stands  pre-eminent,  it  was  in  perhaps  equal 
measure  due  to  his  habit  of  keeping  theory  and  practice 
closely  combined.  People  studied  his  reasoning  carefully 
because  it  was  applied  to  things  which  they  really  wanted 
to  understand,  and  was  constantly  supported  by  an  appeal 
to  the  observed  facts  of  business  life. 

I  am  very  far  from  trying  to  substitute  economic  his- 
tory for  economic  theory.  In  a  book  like  this,  the  ex- 
planations are  the  important  thing ;  the  presentation  of 
facts  is  not  an  end  in  itself,  but  a  means  of  making  the 
explanation  clear  and  comprehensive.  The  reader  will  be 
disappointed  if  he  expects  to  find  a  complete  and  well- 
ordered  history  of  the  financial  and  industrial  policy  of 
various  nations.  For  such  a  history,  he  should  look  to 
the  various  works  that  deal  with  the  special  departments 
of  finance,  commerce,  or  industry.  A  work  like  this  is 
designed  to  enable  him  to  make  use  of  such  books,  not 
to  dispense  with  them. 

In  thus  connecting  theory  and  practice  and  giving  due 
prominence  to  the  work  of  the  speculator  in  modern  in- 
dustry, I  have  found  myself  obliged  to  abandon  the  time- 
honored  division  of  the  science  into  the  departments  of 
production,  distribution,  exchange,  and  consumption. 
The  subjects   which  are    commonly  treated    under  the 


PREFACE.  Vii 

head  of  production  are  chiefly  found  in  chapters  ii,  v, 
and  vi ;  those  which  are  commonly  treated  under  the 
head  of  exchange  will  be  found  in  chapters  iii,  iv,  vii,  and 
viii ;  while  the  last  six  chapters  deal  principally  with 
questions  of  distribution,  and  incidentally  with  those  of 
consumption. 

My  obligations  to  previous  writers,  in  general  and  in 
detail,  are  something  which  I  cannot  possibly  express  in 
full.  When  a  scientific  principle  is  specially  identified 
with  the  name  of  some  particular  author,  I  have  taken 
pains  to  credit  it  to  its  proper  source — especially  in  the 
case  of  work  which,  from  its  newness  or  for  any  other 
reason,  has  not  become  part  of  the  general  stock  of 
economic  discussion.  In  other  cases,  I  have  limited  my 
citations  to  those  books  which  are  likely  to  prove  most 
accessible  and  useful  to  the  reader  who  desires  to  pursue 
special  subjects  farther  than  can  be  done  within  the 
limits  of  a  general  text-book.  The  titles  of  such  books 
have  been  for  the  most  part  placed  at  the  head  of  the 
chapters  bearing  on  the  specific  subjects  with  which  they 
deal ;  thus  forming  a  bibliography  which,  while  very  in- 
complete, may  yet  prove  serviceable  to  some  readers. 
Other  things  being  equal,  I  have  included  works  which 
are  written  in  English,  rather  than  in  foreign  languages, 
and  have  cited  English  translations  rather  than  originals. 

I  am  indebted  for  material  aid  to  my  colleagues  Messrs. 
Irving  Fisher  and  J.  C.  Schwab  ;  and  still  more  to  my  wife, 
on  whom  I  have  depended  both  for  criticism  and  for  assist- 
ance at  every  stage  of  the  work. 

Yale  University,  New  Haven, 
March,  1896. 


CONTENTS. 


CHAPTER  I. 

*>AGE 

Public  and  Private  Wealth i 

Preliminary  Definitions — Development  of  Economic  Science- 
Individualism  and  Socialism — Standards  of  Public  Good. 

CHAPTER  II. 
Economic  Responsibility   .         .  ...     26 

Slavery — Property — Emancipation — The  Persistence  of  Poverty 
— The  Malthusian  Theory — Poor  Relief — Compulsory  Insurance. 

CHAPTER  III. 

Competition 64 

Freedom  of  Exchange — Bargaining — Mercantile  Competition — 
Market  Price — Effects  of  Competition— Normal  Price — Value — 
Socialistic  Theory  of  Value. 

CHAPTER    IV. 
Speculation 97 

Gambling  —  Insurance —  Commercial  Speculation  —  Legitimate 
and  Illegitimate  Transactions — Industrial  Speculation — Func- 
tions of  the  Capitalist. 

CHAPTER    V. 

Investment  of  Capital 121 

The  Wage  System — Private  Land  Ownership — Patent  Right — 
Legalization  of  Interest — Usury  Laws — Limited  Liability. 


X  ECONOMICS. 

CHAPTER  VI. 

PACK 

Combination  of  Capital  151 

Modem  Tendencies  toward  Monopoly — Their  Effect  on  Prices — 
Limitation  of  Profits — Laws  Fixing  Rates — Problems  of  Rail- 
road Regulation — Enforcement  of  Responsibility. 

CHAPTER  VII. 

Money 180 

Its  Functions  and  Forms — Seigniorage — Depreciation — The 
General  Level  of  Prices — Conflicts  between  Debtor  and  Creditor 
— Bimetallism  in  Theory  and  in  History — Irredeemable  Paper 
Money. 

CHAPTER  VIII. 

Credit 232 

Checks  and  Clearings — Domestic  and  Foreign  Exchange — In- 
fluence of  Deposit  Accounts  on  Prices — Note  Issue  and  its 
Dangers — Attempts  to  Regulate  Note  Issue— The  Government 
as  a  Banker. 

CHAPTER  IX. 

Profits 264 

Competition  among  Investors — The  Rate  of  Interest — Causes  of 
Variation — Economic  Rent — Net  Profits  and  Losses — Commer- 
cial Crises. 

CHAPTER  X. 

Wages 301 

Piece-Wage  and  Time- Wage — ^What  Constitutes  Demand  for 
Labor — The  Popular  Theory — The  Wage-Fund  Theory — 
The  Residual  Theory — The  Laborer  as  a  Consumer — Wages 
Depend  on  Maximum  Economy  of  Consumption — With  Some 
Men  this  is  Obtained  by  Low  Wages  and  Low  EflSciency,  with 
Others  by  High  Wages  and  High  E£5ciency. 

CHAPTER  XI. 

Machinery  and  Labor 336 

Alleged  Displacement  and  Degradation  of  Labor — Factory  Acts 
— Labor  Organizations — Old  aud  New  Methods — Compulsory 
Arbitration — The  Living  Wage. 


CONTENTS.  Xi 

CHAPTER  XII. 

PAGE 

Cooperation         .         .         .         .         .         .        .         .  370 

Profit-Sharing — Producers'  Cooperation — Forms  of  Consumers' 
CoSperation — Government  Management  of  Industrial  Enter- 
prises. 

CHAPTER  XIII. 

Protective  Legislation 404 

The  Eight-Hour  Movement — The  Contract  System — Prison 
Labor — Foreign  Immigration — Protective  Tariffs — The  Popular 
Argument — The  Development  of  Infant  Industries — Political 
and  Military  Questions  Involved. 

CHAPTER  XIV. 

Government  Revenue 447 

Its  Different  Forms — Principles  of  Taxation — Certainty  the  Pri- 
mary Object — Incidence  of  Taxation — Direct  and  Indirect  Taxes 
— Property  and  Income  Taxes — Progressive  Taxation — The 
Single  Tax— Public  Debts. 


ECONOMICS: 


AN  ACCOUNT  OF  THE  RELATIONS  BETWEEN  PRI- 
VATE PROPERTY  AND  PUBLIC  WELFARE. 


CHAPTER  I. 

PUBLIC   AND   PRIVATE   WEALTH. 

Preliminary  Definitions — History  of  Economic  Science — Individualism  and 
Socialism — Standards  of  Public  Good, 

Luigi  Cossa  :  "An  Introduction  to  the  Study  of  Political  Economy"; 
translated  by  L.  Dyer.  London,  1893.  An  admirable  history  and  bibli- 
ography. Its  title  is  a  little  misleading,  as  the  book  is  of  more  use  to 
advanced  students  than  to  beginners. 

J,  N.  Keynes  :  "  The  Scope  and  Method  of  Political  Economy."  Lon- 
don, 1891. 

Among  the  many  critical  histories  of  socialism  the  most  useful  is  perhaps 
that  of  John  Rae  :  2d  ed.,  London  and  New  York,  1891.  A  good  pres- 
entation of  the  ideas  and  aims  of  moderate  socialists  is  given  in  "Fabian 
Essays  in  Socialism"  ;  edited  by  G.  B.  Shaw.  London,  1890.  New  York. 
l8gi.  For  a  brief  statement  of  extreme  individualistic  views  see  W.  G. 
Sumner:  "What  Social  Classes  Owe  to  Each  Other"  New  York,  1883: 
for  a  fuller  development,  W.  Donisthorpe  :  "  Individualism  "  London. 
1889. 

§  I.  In  the  Middle  Ages  questions  of  industrial  policy 
were  treated  by  most  writers  as  incidental  details  in  a  sys- 
tem of  theology  or  of  law.  But  in  the  sixteenth  and  seven- 
teenth centuries  people  began  to  separate  the  study  of 
matters  affecting  a  nation's  commerce  and  finance  from 
the  more  general  consideration  of  its  politics  or  its  morals, 


2  PUBLIC  AND   PRIVATE    WEALTH. 

and  to  develop  an  art  of  political  eco7iomy  which  should 
guide  the  statesman  in  his  efforts  to  promote  public  wealth, 
as  the  arts  of  personal  and  industrial  economy  guide  the 
individual  in  his  pursuit  of  private  wealth.  In  their  at- 
tempts to  formulate  the  rules  of  this  art,  writers  of  the 
eighteenth  century  discovered  certain  laws  which  are  the 
basis  of  the  modern  science  of  economics. 

§  2.  But  what  is  public  wealth  ? 

In  the  first  place  it  is  not  the  same  thing  as  government 
property.  It  is  something  far  wider.  The  individual 
citizens  are  a  part  of  the  nation  just  as  much  as  the 
government  is  ;  their  property,  no  less  than  that  of  the 
government,  must  be  included  in  any  rational  attempt 
to  estimate  the  industrial  resources  of  the  commun- 
ity. Waterworks  and  railroads  owned  by  private  com- 
panies are  just  as  much  part  of  the  public  wealth  as  are 
municipal  waterworks  or  national  railroads.  Whether 
the  public  wealth  is  likely  to  be  increased  in  any  particu- 
lar case  as  an  indirect  result  of  making  more  of  it  public 
property,  can  only  be  decided  by  examining  the  circum- 
stances of  that  case.  It  will  depend  upon  how  well  such 
property  is  managed.  If  the  agents  of  the  government 
are  disinterested  and  wise  enough,  the  public  property 
will  probably  be  made  to  render  more  service  than  pri- 
vate property ;  if  they  are  not  disinterested  and  wise,  it 
will  probably  be  made  to  render  less  service.  In  the 
latter  case,  the  "  nationalization  "  of  a  piece  of  property 
will  tend  to  diminish  the  public  wealth  instead  of  increas- 
ing  it. 

§  3.  Nor  can  we  estimate  the  public  wealth  of  a  nation 
by  taking  the  sum  of  the  property  of  its  individual  mem- 
bers. Many  things  like  pure  air  and  abundant  water  sup- 
ply, which  form  most  valuable  elements  of  public  wealth, 
are  hardly  counted  as  private  property  at  all.  A  property- 
right  is  a  title  to  part  of  the  public  wealth  ;  but  the 
amount  of  these  titles  outstanding  forms  no  indication 


THE  DISTINCTION  ILLUSTRATED.  3 

of  the  amount  of  enjoyment  which  the  public  can  com- 
mand. The  exchange  value  of  a  property-right  is  con- 
nected with  its  exclusiveness.  It  depends  not  so  much 
upon  the  enjoyment  which  the  property  can  be  made  to 
afford  as  upon  the  completeness  with  which  its  owner  can 
monopolize  that  enjoyment  for  himself  or  his  friends  to 
the  exclusion  of  the  general  public. 

The  total  value  of  these  rights  of  exclusion  does  not 
necessarily  correspond  in  any  way  with  the  resources  avail- 
able for  the  public.  It  is  quite  misleading  to  measure  a 
nation's  wealth  by  a  census  of  the  property  of  its  mem- 
bers. Property-rights  may  be  created  without  increas- 
ing public  wealth  or  destroyed  without  diminishing  it.' 
Under  the  English  system  of  enclosures,  land  which  had 
formerly  been  free  to  all  the  public  was  made  the  subject 
of  private  ownership.  By  this  practice  there  was  a  crea- 
tion of  property-rights  without  production  of  wealth. 
The  landlords  now  had  something  valuable  which  could 
be  bought  or  sold  and  which  did  not  exist  before  ;  but 
the  wealth  of  the  community  was  in  no  wise  increased. 
There  were  no  more  means  of  enjoyment  in  existence 
than  there  had  been  previously.  On  the  other  hand,  the 
abolition  of  slavery  involves  a  diminution  of  private 
property  without  a  corresponding  loss  of  public  wealth. 
It  sweeps  away  an  enormous  mass  of  exchangeable  wealth 
of  individuals.  Systems  of  compensation  to  the  owners 
of  such  wealth,  though  they  may  shift  the  burden,  can- 
not annul  the  loss.  Yet  such  a  loss  is  simply  a  destruc- 
tion of  titles  and  transferable  rights.  It  does  not  destroy 
means  of  happiness.  The  wealth  of  the  community, 
judged  by  public  standards,  is  as  great  after  abolition  as 
it  was  before. 

A  curious  instance  where  loss  of  private  wealth  went 
hand  in  hand  with  gain  in  public  wealth  is  furnished  by 
the  history  of  the  waterworks  in  the  city  of  Venice.    For- 

'  But  see  S  12. 


4  PUBLIC  AND  PRIVATE    WEALTH. 

merly  water  was  so  scarce  that  it  commanded  a  price^ 
and  a  good  well  was  a  source  of  considerable  private 
wealth  to  its  possessors.  But  when  an  abundant  supply 
of  water  was  furnished  at  slight  cost,  the  commercial 
character  of  the  water  changed,  and  it  could  under  all 
ordinary  circumstances  be  had  for  nothing.  But  the  very 
abundance  of  water,  which  makes  it  commercially  worth 
nothing,  is  an  element  of  public  wealth  ;  and  the  scarcity 
which  makes  it  a  valuable  article  of  property  is  a  symptom 
of  public  poverty. 

The  high  price  of  real  estate  in  New  York  City,  which 
forms  an  enormous  item  of  private  wealth,  is  partly  con- 
nected with  causes  that  promote  the  public  wealth  and 
partly  with  those  that  antagonize  it.  So  far  as  it  is  due 
to  the  excellence  of  the  harbor  and  other  things  which 
make  New  York  an  admirable  trade  centre,  it  connotes 
a  public  good.  So  far  as  it  is  connected  with  the  narrow- 
ness of  Manhattan  Island  and  other  things  which  limit 
the  number  of  people  who  can  most  conveniently  avail 
themselves  of  these  privileges,  it  connotes  a  public  evil. 

§  4.  Improvements  in  the  arts  have  had  a  beneficial 
effect  on  the  public  wealth  of  nations  wholly  out  of  pro- 
portion to  any  gains  which  they  have  enabled  individu- 
als to  appropriate  for  their  own  exclusive  advantage. 
This  benefit  cannot  be  measured  in  money.  If  an  improve- 
ment enables  the  same  number  of  laborers  to  produce 
twice  the  amount  of  useful  products,  it  may  happen  that 
the  price  of  each  product  will  fall  one  half.  In  this  case 
there  is  no  apparent  gain  in  private  wealth  ;  but  if  the 
article  is  a  really  useful  one,  there  is  a  great  gain  in 
public  wealth  and  social  well-being  through  its  increased 
abundance. 

The  true  basis  for  an  estimate  of  a  nation's  wealth  is  to 
be  found  in  the  enjoyments  of  its  members.  The  wealth 
of  a  community  does  not  depend  on  the  money  value  of 
its  means  for  such  enjoyment,  nor  even  on  their  physical 


INCOME  AND   CAPITAL.  5 

amount,  but  on  their  utilization.  Public  wealth  is  "  a  flow 
and  not  a  fund  "  ;  it  is  to  be  measured  as  income  and  not 
as  capital. 

§  5.  The  distinction  between  capital  and  income  as 
modes  of  measuring  '  resources  is  almost  as  important  as 
the  distinction  between  public  and  private  wealth,  and  is 
quite  as  much  neglected  in  current  economic  discussion. 

If  a  man  for  a  series  of  years  earns  $io,cxx>  a  year  and 
spends  it  all,  he  is  always  rich  in  one  sense,  and  never  in 
another.  He  has  much  income  and  no  capital — unless 
we  stretch  the  idea  of  capital  wide  enough  to  include  the 
skill  which  enables  him  to  earn  the  large  income.  In  like 
manner  a  nation  whose  members  habitually  produce  much 
and  consume  much,  will  have  large  enjoyments  and  small 
accumulations.  Measured  as  income  its  public  wealth 
will  be  large ;  measured  as  capital  it  will  be  small. 

The  distinction  between  capital  and  income  is  not  due 
to  a  difference  in  the  things  themselves,  but  to  a  differ- 
ence in  methods  of  measurement.  The  capital  of  an 
individual  or  a  community  is  an  amount  of  wealth  in 
existence  at  a  particular  moment.  The  income  of  an 
individual  or  a  community  is  an  amount  of  wealth  ob- 
tained during  a  specified  period.  Capital  is  being  con- 
stantly converted  into  income  and  income  into  capital. 
But  capital,  under  all  times  and  conditions,  is  measured 
as  a  quantity,  while  income  is  more  properly  measured  as 
a  rate.  Capital  is  a  static  conception,  independent  of 
time ;  income  a  dynamic  conception  involving  the  time 
element. 

We  see  this  distinction  illustrated  in  the  balance 
sheets  of  any  large  industrial  enterprise.  The  capital 
account  of  a  railroad  company  gives  the  property  which 
it  owns  at  a  particular  moment — road,  equipment,  land, 

'  For  the  development  of  this  distinction,  which  involves  a  combination 
of  the  ideas  of  Knies  and  Newcomb,  I  am  much  indebted  to  my  colleague 
Dr.  Irving  Fisher. 


6  PUBLIC  AND  PRIVATE  WEALTH. 

buildings,  stocks  of  other  corporations,  accounts  payable, 
materials  and  cash  on  hand.  The  income  account  gives 
its  earnings  during  the  year  preceding— from  passengers, 
freight,  mail,  express,  and  other  sources.  The  two  ac- 
counts deal  with  the  same  road,  but  with  a  totally  differ- 
ent set  of  items;  and  while  the  amount  of  the  one  has  a 
great  influence  on  the  other,  there  is  no  direct  connection 
between  the  two. 

§  6.  As  a  matter  of  pure  mathematics,  a  quantity  of 
capital  and  a  rate  of  income  should  be  as  incommensur- 
able as  a  line  and  an  angle.  In  practice,  however,  we 
are  constantly  comparing  the  two.  The  rate  of  interest 
furnishes  a  basis  on  which  we  compare  and  exchange 
capital  and  income  with  one  another.  If  we  say  that  the 
rate  of  interest  is  five  per  cent,  we  mean  that  we  regard 
an  income  of  five  dollars  a  year  as  equivalent  to  a  capital 
of  a  hundred  dollars.  The  causes  which  determine  this 
basis  of  comparison  are  extremely  complicated  ;  they  are 
treated  at  length  in  chapter  ix. 

§  7.  Of  the  two  methods  of  measuring  wealth,  the  in- 
come standard  is  of  more  primary  importance ;  that  of 
capital  is  secondary.  Accumulations  of  capital  have  their 
chief  usefulness  as  means  of  producing  income.  For  this 
reason  the  term  capital  is  confined  in  ordinary  usage  to 
things  which  are  valued  in  connection  with  productive 
industry.  As  thus  limited,  the  word  capital,  in  its  public 
sense,  means  wealth  used  for  producing  more  wealth.  A 
nation's  capital  consists  mainly  of  food,  necessary  cloth- 
ing and  shelter,  materials,  machinery,  means  of  transporta- 
tion, and  instruments  of  exchange.  It  is  impossible  to 
say  just  which  objects  are  capital  and  which  are  not.  It 
is  very  far  from  being  possible  to  form  an  accurate  money 
valuation  of  the  amount  of  such  capital.  On  the  other 
hand,  private  capital  is  property  used  for  acquiring  more 
property.  We  can  tell  with  substantial  accuracy  what 
property  each  individual  is  using  as  capital,  and  can  esti- 


DIFFERENT  MEANINGS  OF  CAPITAL.  / 

mate  its  money  value  very  closely.  Just  as  the  acquisi- 
tion of  property  is  usually  attended  with  production  of 
wealth,  so  the  investment  of  property  as  private  capital 
is  usually  attended  with  accumulation  of  public  capital. 
But  there  are  cases  where  one  takes  place  without  the 
other.  The  burglar's  outfit  or  the  roulette  table  of  the 
gamester  is  private  capital — property  used  for  acquiring 
more  property ;  but  it  certainly  is  not  wealth  used  for 
producing  more  wealth.  On  the  other  hand,  the  pioneer 
in  science  often  adds  greatly  to  the  wealth  of  the  country 
by  the  use  which  he  makes  of  existing  wealth ;  but  the 
cases  are  very  rare  where  he  increases  his  property  in  so 
doing,  or  where  the  attempt  to  acquire  property  is  a 
dominant  motive  in  directing  his  action.  Public  capital  is 
not  the  sum  of  the  private  capital  of  individuals,  any  more 
than  public  wealth  is  the  sum  of  individual  property  rights. 
Public  capital  consists  of  useful  things  ;  capital  goods,  as 
Clark  calls  them.  Private  capital  consists  of  titles  and 
rights  to  a  part  of  those  things.'  The  increase  or  diminu- 
tion of  such  titles  is  not  synonymous  with  an  increase  or 
diminution  of  the  things  themselves. 

§  8.  The  relations  between  the  different  forms  of  wealth 
may  be  summed  up  as  follows  : 

'  Some  economists,  who  see  that  there  is  a  distinction  of  this  kind,  fail  to 
recognize  its  true  nature.  Both  Marx  and  Clark,  for  example,  speak  of 
capital  as  a  permanent  thing,  independent  of  the  transmuted  and  changing 
goods  of  which  it  is  at  each  moment  composed.  But  Clark  regards  this 
thing  as  permanently  productive  and  its  increase  as  normal  and  natural  ; 
while  Marx  regards  it  as  an  unproductive  dead-weight,  whose  increase  is  a 
spoliation  of  the  laborer.  But  what  is  this  thing  which  is  permanent  while 
the  goods  change  ?  It  is  nothing  else  than  the  titles  to  property  in  process 
of  industrial  transmutation  ;  titles  which  carry  with  them  the  control  and 
direction  of  the  process.  Whether  the  existence  of  these  titles  increases  the 
production  of  the  community  depends  on  the  wisdom  with  which  the  con- 
trol is  exercised.  They  are  not  necessarily  productive  as  assumed  by  Clark  ; 
still  less  are  they  necessarily  unproductive  as  held  by  Marx.  They  are  more 
likely  to  be  productive  than  not,  because  our  industrial  arrangements  are 
such  that,  if  men  fail  to  use  their  capital  for  things  the  community  needs,  they 
lose  money  and  are  eliminated  from  control  of  the  next  period  of  production. 


8  PUBLIC  AND  PRIVATE  WEALTH, 

Wealth  in  the  public  sense  consists  of  all  means  of  en- 
joyment, whether  they  have  a  commercial  value  or  not. 
The  use  obtained  from  these  things  in  a  given  period  is 
the  public  income  for  that  period.  The  amount  in  exist- 
ence at  any  given  moment  is  the  public  capital  at  that 
moment  in  the  broadest  sense  of  the  word.  But  it  is  cus- 
tomary to  confine  the  term  capital  to  wealth  which  is 
actually  used  for  producing  more  wealth. 

Wealth  in  its  private  sense,  better  designated  as  prop- 
erty, consists  of  rights  to  part  of  the  public  wealth.  The 
amount  of  such  rights  which  accrues  to  any  person  in  a 
given  period  is  his  income  for  that  period.  The  aggre- 
gate amount  which  he  has  at  any  moment  is  his  capital  in 
the  broadest  sense  of  the  word.  But  here  again  it  is  cus- 
tomary not  to  apply  the  term  capital  to  a  man's  whole 
property,  but  to  confine  it  to  that  part  which  he  lises  as  a 
means  of  acquiring  more  property. 

§  9.  These  distinctions  are  something  which  the  student 
of  economics  must  master  at  the  very  outset.  This  is  not 
so  easy  as  it  appears.  The  political  economists  of  the  six- 
teenth, seventeenth,  and  early  part  of  the  eighteenth  cen- 
turies habitually  confused  public  and  private  wealth.  The 
theories  of  that  time  constitute  what  is  known  as  the 
mercantile  systeyn  of  political  economy,  because  they  in- 
volve the  idea  that  a  nation  should  strive  to  make  money 
in  the  same  manner  as  an  individual  merchant.  Just  as  a 
prudent  business  man  so  manages  his  affairs  as  to  produce 
more  than  he  consumes  and  make  money  by  the  excess 
of  his  sales  over  his  purchases,  it  was  thought  that  a  pru- 
dent statesman  should  so  manage  the  affairs  of  the  nation 
as  to  make  it  produce  more  than  it  consumes  and  export 
more  than  it  imports.  It  was  considered  by  many  that 
this  excess  of  exports  over  imports  constituted  an  index 
of  national  prosperity  and  the  true  measure  of  the  in- 
crease of  national  wealth.  Just  as  the  money  which  an 
individual  has  made  represents  his  power   of  industrial 


MERCANTILISTS  AND  PHYSIOCRATS.  9 

control  over  other  individuals,  it  was  thought  that  the 
money  which  a  nation  had  thus  saved  represented  its 
power  of  control  over  other  nations.  In  fact,  no  small 
part  of  the  commercial  legislation  of  all  countries  has 
been  framed  under  the  influence  of  these  ideas. 

§  10.  The  error  of  the  mercantile  system  was  pointed 
out  by  a  school  of  French  economists  known  as  physio- 
crats, because  they  laid  stress  on  the  powers  of  nature  as 
the  basis  of  national  prosperity  and  public  wealth.  These 
economists  indicated  that  the  true  source  of  national 
power  lay,  not  in  the  supply  of  gold  or  silver,  but  in  the 
supply  of  food  ;  not  in  the  power  to  command  other  na- 
tions' labor,  but  in  the  power  to  develop  its  own  labor. 
A  nation  might  be  prosperous  with  very  little  money /^r 
capita.  This  would  simply  result  in  a  lower  scale  of 
prices.  But  with  little  food  per  capita  great  misery  and 
industrial  inefficiency  must  inevitably  follow.  Instead  of 
encouraging  manufactures,  as  the  mercantile  school  has 
done,  the  physiocrats  were  led  to  undervalue  them.  No 
manufacture,  they  said,  could  exist  except  on  the  basis  of 
a  surplus  of  food  produced  by  the  agricultural  laborers  ; 
and  the  real  cost,  not  to  say  the  real  worth,  of  every 
manufacture  was  measured  by  the  amount  of  food  con- 
sumption which  it  represented.  Food  was  therefore  the 
true  measure  of  wealth,  no  less  than  the  true  source  of 
national  prosperity. 

§  II.  This  was  a  great  advance  from  the  conception  of 
wealth  embodied  in  the  mercantile  system.  But  the 
physiocrats  made  a  mistake  in  laying  too  much  stress 
on  the  quantity  of  food  as  a  measure  of  public  wealth 
and  too  little  on  its  utilization.  The  prosperity  of  a 
nation  depends  far  more  upon  the  use  made  of  its  wealth 
than  upon  the  amount  of  such  wealth  in  existence  at 
any  time.  The  public  income  is  not  represented  by  an 
amount  of  money,  but  by  a  series  of  purchases  made 
with   that  money  ;    not  by  an   amount   of  unconsumed 


lO  PUBLIC  AND  PRIVATE  WEALTH. 

food,  but  by  a  series  of  things  made  and  used  by  those 
who  consume  it.  A  nation  which  has  a  large  amount  of 
capital  and  utilizes  it  badly  may  be  far  less  prosperous 
than  one  with  a  smaller  capital  which  it  transmutes  more 
rapidly. 

The  full  importance  of  this  process  of  transmutation 
was  first  recognized  by  Adam  Smith,  whose  Inquiry  Into 
the  Nature  and  Causes  of  the  Wealth  of  Nations,  published 
in  1776,  is  usually  regarded  as  the  starting-point  of  modern 
political  economy.*  He  agreed  with  the  physiocrats  in 
their  strictures  on  the  mercantile  system,  but  his  concep- 
tion of  public  wealth  was  broader  and  truer  than  theirs. 
He  also  showed,  far  more  clearly  than  any  of  his  prede- 
cessors, the  relation  between  the  pursuit  of  private  wealth 
and  the  utilization  of  public  wealth.  He  proved  that  the 
former  was  a  most  powerful  agency  for  furthering  the  lat- 
ter ;  that  the  actions  of  men  in  their  pursuit  of  money- 
making  were  a  means  of  serving  others  even  when  they 
had  no  intention  or  consciousness  of  so  doing.  Modern 
economists  have  followed  in  the  lines  laid  down  by  Adam 
Smith.  Their  inquiry  into  the  causes  of  the  wealth  of 
nations  has  connected  itself  with  an  inquiry  into  the 
results  of  the  property  rights  of  individuals  and  the 
motives  connected  with  them.  This  twofold  aspect  of 
the  science  is  recognized  in  the  definition  given  on  the 
title-page  of  the  present  work, — An  Account  of  the  Rela- 
tions between  Private  Property  and  Public  Welfare. 

§  12.  The  perception  of  this  relation  between  the  ac- 
quisition of  property  and  the  production  of  wealth  has 
had  several  important  consequences.  In  the  first  place,  it 
has  changed  the  attitude  of  the  public  mind  toward  trade. 
In  ancient  times  trade  was  regarded  as  a  fight  between 
buyer  and  seller ;    to-day  it  is  looked  at   as  a  means  of 

»  The  best  edition  is  that  of  J,  E.  Thorold  Rogers,  Oxford,  1880.  W, 
J.  Ashley  has  published  an  excellent  abridgment  (New  York  and  London 
iSgi),  which  presents  the  most  important  parts  in  very  narrow  compass. 


J 


MODERN    VIE  WS  OF  MONE  Y-MAKING.  1 1 

mutual  service.  To  the  mediaeval  economist  the  business 
man  was  a  licensed  robber;  to  the  modern  economist  he 
is  a  public  benefactor.  Five  hundred  years  ago  it  was 
thought  that  a  man  could  make  money  only  by  buy- 
ing goods  for  less  than  they  were  worth,  or  by  selling 
them  for  more  than  they  were  worth  ;  that  each  business 
transaction  involved  the  temptation  to  cheat ;  and  that  if 
a  man  was  successful  in  business  it  showed  that  that 
temptation  had  been  too  much  for  him.  To-day  we 
believe  that  money  is  made  on  a  large  scale  by  doing  the 
public  a  service.  If  a  man's  goods  command  a  high  price 
we  assume  that  he  has  met  an  actual  need.  If  this  price 
furnishes  him  a  large  margin  of  profit,  we  believe  that  he 
has  so  organized  the  labor  under  his  control  as  to  diminish 
not  only  his  own  expenses  but  the  actual  labor  cost  of 
producing  the  goods.  So  confident  are  we  of  the  substan- 
tial identity  of  interest  between  the  business  man  and  the 
community  as  a  whole,  that  we  give  our  capitalists  the 
freest  chance  to  direct  the  productive  forces  of  society  to 
their  own  individual  profit.  Even  the  mistakes  of  private 
enterprise  may  prove  a  means  of  progress  to  society,  since 
they  show  at  comparatively  small  cost  what  is  to  be 
avoided  in  the  future.' 

§  13,  A  second  result  is  a  change  in  the  attitude  of 
economists  toward  state  interference.  When  people 
thought  that  every  business  man  was  trying  to  serve  him- 
self at  the  expense  of  the  community,  a  large  number  of 
restrictions  of  all  kinds  were  brought  into  play.  The 
commercial  legislation  of  past  centuries  was  a  mass  of 
such  restrictions.  Adam  Smith  and  his  successors  showed 
that  the  bulk  of  this  legislation  had  a  very  different  effect 
from  what  was  intended.  Instead  of  preventing  extortion, 
it  prevented  mutual  service.  Instead  of  enabling  the 
nation  as  a  whole  to  make  money,  it  interfered  with  the 

'  Compare  J.  S.  Mill,  "  On  Liberty,"  London,  1839  ;  John  Morley,  *'  On 
Compromise,"  London,  1877. 


12  PUBLIC  AND  PRIVATE  WEALTH. 

development  of  its  resources  and  the  wise  application  of 
its  labor.  To  so  great  an  extent  were  the  economists 
able  to  point  out  the  evil  results  of  mistaken  legislation, 
that  in  the  popular  mind  the  teaching  of  economics  has 
become  synonymous  with  the  effort  to  reduce  the  activity 
of  government  to  a  minimum.  The  phrase  Laissez  faire, 
laissez  passer  (let  things  take  their  own  course),  which 
was  the  motto  of  the  physiocrats,  has  taken  an  exagger- 
ated hold  on  the  public  imagination,  and  has  been  regarded 
as  a  fundamental  axiom  of  economic  science,  when  it  is  in 
fact  only  a  practical  maxim  of  political  wisdom,  subject  to 
all  the  limitations  which  experience  may  afford. 

§  14.  A  third  result  is  to  make  people  treat  political  econ- 
omy as  a  science  instead  of  an  art.  The  earliest  students  of 
the  subject  thought  that  political  economy  was  the  art  of 
managing  the  business  affairs  of  a  community  in  the  same 
way  that  domestic  economy  is  the  art  of  managing 
the  business  affairs  of  a  household.  The  modern  econo- 
mist rejects  the  idea  of  paternalism  involved  in  this 
conception.  He  sees  that  the  attempts  of  government 
authorities  to  manage  the  economy  of  a  nation,  however 
well  meant,  are  apt  to  defeat  their  own  ends  ;  that  the 
growth  of  national  wealth  depends  upon  causes  far  deeper 
and  more  powerful  than  those  which  the  statesman  or 
legislator  can  control ;  and  that  more  is  to  be  accomplished 
by  trying  to  observe  and  study  these  causes  than  by  seek- 
ing to  repress  their  operation.  In  this  modern  view  we 
are  able  to  develop  a  true  science  of  political  economy. 
It  is  one  which  concerns  itself  primarily  with  explanations 
rather  than  precepts.  It  bears  the  same  relation  to  the 
arts  of  statesmanship  and  legislation  that  the  science  of 
physiology  bears  to  the  art  of  medicine,  or  the  science  of 
mechanics  to  the  art  of  engineering.  It  does  not  prescribe 
to  the  statesman  or  legislator  exactly  what  he  shall  do,  as 
the  ancient  art  of  political  economy  would  have  attempted  ; 
but  it   indicates   limits   which   he   cannot   pass  without 


ECONOMIC  LAWS.  1 3 

defeating  his  own  ends.  Economics  does  not  say  that  all 
men  must  be  left  free  to  make  their  own  contracts,  any 
more  than  mechanics  says  that  all  buildings  must  be  con- 
structed on  geometrical  patterns.  But  each  science  sets 
forth  the  conditions  of  stability  and  the  laws  of  structural 
strain,  which  the  statesman  or  the  builder  disregards  at 
his  own  peril. 

§  15.  In  the  modern  conception  of  economics  the  word 
law  is  necessarily  used  in  two  quite  distinct  senses.  In 
the  majority  of  cases  the  economist  is  primarily  occupied 
with  establishing  and  investigating  natural  laws,  or  ob- 
served sequences  of  cause  and  effect.  In  spite  of  indi- 
vidual variations,  it  is  now  recognized  that  the  average  or 
typical  conduct  of  masses  of  men  operates  with  a  high 
degree  of  regularity.  The  modern  science  of  statistics  is 
based  on  the  existence  of  such  regularity,  and  concerns 
itself  exclusively  with  natural  laws  of  this  kind.  But  the 
economist  also  includes  in  the  scope  of  his  investigations 
\.\i&  positive  laws  or  commands  relating  to  wealth,  whether 
moral  or  jural  in  their  character ;  the  former  deriving 
their  authority  from  the  moral  sentiments  or  religious 
beliefs  of  the  community,  while  the  latter  are  promulgated 
and  enforced  by  the  government. 

§  16.  With  the  growth  of  these  modern  ideas  of  sci- 
entific method,  the  name  economics,  which  is  essentially 
that  of  a  science,  is  gradually  being  substituted  for  the 
older  term  political  economy,  which  was  in  some  respects 
more  applicable  to  an  art. 

§  17.  It  was  not  by  mere  chance  that  the  Declaration 
of  Independence  and  the  Wealth  of  Nations  were  pub- 
lished at  so  nearly  the  same  time.  Each  involved  the 
recognition  of  the  same  principle  in  different  fields  of 
human  activity.  In  modern  politics  we  have  seen  that 
society  is  better  governed  by  allowing  individuals,  as  far 
as  possible,  to  govern  themselves.  In  modern  economics 
we  have  seen  that  society  is   made  richer  by  allowing 


14  PUBLIC  AND  PRIVATE  WEALTH. 

individuals,  as  far  as  possible,  freedom  to  get  rich  in  their 
own  ways.  Each  of  these  principles  has  its  limits  ;  but 
each  marks  an  immeasurable  advance,  in  politics  and  in 
economics,  over  the  system  of  police  government  which 
had  preceded  it. 

This  development  of  individualism  in  economics  is  part 
of  the  general  trend  of  modern  thought  and  modern  life. 
A  few  centuries  ago,  the  principle  of  individual  freedom 
was  not  recognized  in  law  or  in  morals,  any  more  than  in 
trade.  It  was  then  thought  that  liberty  in  trade  meant 
avarice,  that  liberty  in  politics  meant  violence,  and  that 
liberty  in  morals  meant  blasphemous  wickedness.  But 
as  time  went  on,  the  modern  world  began  to  see  that  this 
old  view  was  a  mistake.  Human  nature  was  better  than 
it  had  been  thought.  Man  was  not  in  a  state  of  war  with 
his  Creator  and  all  his  fellow-men,  which  it  required  the 
combined  power  of  the  church  and  the  police  to  repress. 
When  a  community  had  achieved  political  freedom,  its 
members  on  the  whole  used  that  freedom  to  help  one 
another  instead  of  to  hurt  one  another.  When  it  had 
achieved  moral  freedom,  it  substituted  an  enlightened 
and  progressive  morality  for  an  antiquated  and  formal 
one.  When  it  had  achieved  industrial  freedom,  it  sub- 
stituted high  efificiency  of  labor  for  low  efSciency,  and 
large  schemes  of  mutual  service  for  small  ones.  Con- 
stitutional liberty  in  politics,  rational  altruism  in  morals, 
and  modern  business  methods  in  production  and  dis- 
tribution of  wealth  have  been  the  outcome  of  the  great 
individualistic  movement  of  the  nineteenth  century.  The 
individualist  has  taught  people  not  to  confound  public 
morality  with  a  state  church,  public  security  with  police 
activity,  or  public  wealth  with  government  property.  He 
has  taught  men  that,  as  society  develops,  the  interests  of 
its  members  become  more  and  more  harmonious ;  in 
other  words,  that  rational  egoism  and  rational  altruism 
tend  to  coincide.     In  fact  his  chief  danger  lies  in  exag- 


INDIVIDUALISM  AND   SOCIALISM.  I  5 

gerating  the  completeness  of  this  coincidence  in  the 
existing  imperfect  stage  of  human  development,  and  in 
believing  that  freedom  will  do  everything  for  society, 
economically  and  morally.  He  is  prone  to  assume  that 
private  property  would  necessarily  be  managed  in  the 
public  interest,  and  is  in  danger  of  treating  the  increase 
of  such  property  as  a  good  in  itself  instead  of  a  means  to 
the  public  good.' 

§  18.  These  mistakes  and  exaggerations  of  individualism 
have  afforded  a  legitimate  field  for  socialistic  criticism. 
A  socialist,  in  the  proper  definition  of  the  word,  is  a  man 
who  distrusts  these  conclusions  of  the  individualist  and 
who  believes  that  the  loss  from  the  exercise  of  individual 
freedom  in  most  of  the  debatable  cases  outweighs  the 
gain.  Scientific  socialists  have  done  admirable  work  in 
pointing  out  where  the  evils  arising  from  individual  free- 
dom may  exceed  its  advantages,  and  when  society  must 
use  its  collective  authority  to  produce  the  best  economic 
and  moral  results.  Men  of  this  type  must  recognize  that 
the  point  of  issue  between  individualism  and  socialism  is 
not  a  question  of  ends,  but  of  means.  Both  sides  have 
the  same  object  at  heart,  namely,  the  general  good  of 
society.  One  side  believes  that  this  good  is  best  achieved 
by  individual  freedom  in  a  particular  line  of  action  ;  the 
other  side  believes  that  the  dangers  and  evils  with  which 
such  freedom  is  attended  outweigh  its  advantages. 

§  19.  Unfortunately  the  contest  between  individual- 
ists and  socialists  has  not  been  carried  on  in  a  spirit 
which  could  lead  to  mutual  understanding.  The  individ- 
ualist is  apt  to  regard  the  socialist  as  revolutionary,  in 
the  face  of  the  fact  that  in  conservative  countries  like 
England  a  great  many  of  the  ideas  of  socialism  have  been 
carried  out  by  constitutional  methods  and  in  the  most 

'  An  illustration  of  this  danger  is  seen  in  the  writings  of  the  brilliant 
French  economist  Bastiat,  whose  "  economic  harmonies"  are  sometimes  as 
overstrained  as  the  "  economic  antinomies  "  of  socialists  like  Proudhon. 


l6  PUBLIC  AND  PRIVATE  WEALTH. 

peaceable  fashion.  The  socialist  is  apt  to  regard  the  in- 
dividualist as  hard-hearted  and  immoral,  in  the  face  of  the 
fact  that  the  group  of  individualist  thinkers  at  the  close 
of  the  last  century,  headed  by  Jeremy  Bentham,  did  more 
to  promote  practical  morality  and  enlightened  care  for 
the  unfortunate  than  had  been  accomplished  for  centuries 
previous.  The  socialist  thinks  that  the  individualist's 
ideal  of  a  good  citizen  is  the  "  economic  man,"  solely  oc- 
cupied with  the  pursuit  of  wealth,  whom  some  economists 
have  used  as  a  lay  figure  on  which  to  exhibit  their  deduc- 
tions. He  charges  the  individualist  with  glorifying  the 
pursuit  of  wealth  and  making  it  the  chief  end  of  man. 
This  is  exactly  the  reverse  of  the  truth.  The  individual- 
ist views  the  pursuit  of  private  wealth,  not  as  an  end,  but 
as  a  means  to  the  general  well-being  of  society.  He 
shows  that  the  effort  to  make  money  is  a  most  powerful 
incentive  to  work  in  the  service  of  the  community — in 
fact  the  most  powerful  incentive  the  world  has  yet  known ; 
and  that  within  certain  limits  the  commercial  success  or 
failure  of  an  enterprise  is  dependent  upon  the  question 
whether  the  community  needs  it.  To  this  extent  he  may 
be  said  to  glorify  the  pursuit  of  wealth,  in  showing  that  it 
is  a  means  of  mutual  service  instead  of  mutual  robbery, 
an  honorable  ambition  instead  of  a  base  one.  But  in  thus 
elevating  it  to  its  proper  place  in  the  social  order,  he  also 
reduces  it  to  its  proper  place.  By  understanding  the  uses 
of  the  commercial  system,  he  is  able  the  more  effectively 
to  criticise  its  abuses.  The  day  is  past,  if  ever  there 
was  one,  when  indiscriminate  condemnation  of  business 
methods  and  business  ambition  can  be  effective.  The 
moralist  who  tries  to  show  that  money-getting  is  a  mean 
thing  overshoots  the  mark.  His  own  acts,  in  his  daily 
life,  are  usually  enough  to  convict  him  of  inconsistency. 
The  economist,  on  the  other  hand,  in  pointing  out  the 
reasons  why  modern  business  methods  are  approved  by 
society,  puts   himself  in  a  position   to  condemn   those 


INTELLECT    VERSUS  EMOTION.  \J 

methods  when  they  are  carried  to  a  point  where  they 
cease  to  be  of  social  service,  and  violate  instead  of  fur- 
thering the  purposes  which  have  justified  their  existence. 

§  20.  Individualism  is  not  a  creed  or  a  platform,  but 
a  way  of  looking  at  things ;  and  the  same  may  be  said  of 
socialism.  The  difference  between  individualists  and 
socialists  is  largely  a  matter  of  temperament.  It  comes 
from  a  difference  in  constitution  which  leads  the  individu- 
alist to  calculate  the  large  and  remote  consequences  of 
any  measure  and  ignore  the  immediate  details,  while  the 
socialist  feels  the  immediate  details  so  strongly  that  he 
distrusts  the  somewhat  abstract  lines  of  thought  which  the 
individualist  is  prone  to  follow.  There  is  always  some 
danger  that  the  individualist  will  undervalue  the  emo- 
tional element  in  dealing  with  economic  matters.  Men 
of  the  more  purely  intellectual  type  are  liable  to  mistakes 
of  this  sort.  Reasoning  about  human  conduct  is  full  of 
chances  of  error ;  and  if  the  outcome  of  such  reasoning  is 
to  leave  a  considerable  number  of  human  beings  in  hope- 
less misery,  the  socialist  is  justified  in  demanding  that 
every  premise  and  every  inference  in  the  chain  of  reason- 
ing be  tested,  and  every  rational  experiment  be  made  to 
see  whether  such  a  consequence  is  really  inevitable.  In- 
stances have  not  been  wanting  where  the  conclusions  of 
the  economists  have  proved  wrong,  and  the  emotions  of 
the  critics  have  been  warranted  by  the  event.  The  fac- 
tory legislation  of  England  furnishes  an  historic  example. 
The  economists,  as  a  rule,  condemned  this  legislation  as 
wrong  in  principle  and  likely  to  do  harm  ;  but  the  results 
showed  that  these  economists  had  overlooked  certain 
factors  of  importance  with  regard  to  public  health  and 
public  morals  which  vitiated  their  conclusions  and  justi- 
fied public  opinion  in  disregarding  them. 

But  while  the  men  of  emotion  may  sometimes  be  right 
and  the  men  of  reason  wrong,  the  chances  in  matters  of 
legislation  are  most  decidedly  the  other  way.     It  is  safe 


1 8  PUBLIC  AND  PRIVATE  WEALTH. 

to  say  that  the  harm  which  has  been  done  by  laws  based 
on  unemotional  reasoning  is  but  a  drop  in  the  bucket 
compared  with  that  which  has  been  done  by  laws  based 
on  unreasoning  emotion.  The  tendency  to  overvalue 
feeling  as  compared  with  reason  is  a  far  greater  practi- 
cal danger  than  the  tendency  to  undervalue  it.  For 
legislation  is  essentially  a  matter  of  remote  consequences. 
The  man  who  tries  to  reason  out  these  consequences  will 
occasionally  make  mistakes  ;  the  man  who  refuses  to  reason 
them  out  will  habitually  do  so.  The  good  which  state 
interference  does  is  often  something  visible  and  tangible. 
The  evil  which  it  does  is  much  more  indirect,  and  can 
only  be  appreciated  by  careful  study.  The  man  who  has 
his  mind  so  fixed  on  some  immediate  object  as  to  shut  his 
eyes  to  the  results  of  such  study,  is  almost  certain  to 
advocate  too  much  state  action.  He  may  succeed  in 
passing  a  few  good  laws,  but  he  will  be  responsible  for  a 
vastly  larger  number  of  bad  ones.' 

§  21.  But  how  are  we  to  determine  what  constitutes  the 
general  good  of  society,  or  to  decide,  in  doubtful  cases, 
whether  a  law  is  to  be  regarded  as  good  or  bad  ?  What  is 
to  be  our  standard  of  public  wealth  ?  Shall  we  judge  it 
by  some  preconceived  ethical  code  ?  This  begs  the  whole 
question,  for  every  race  and  every  generation  has  a  dif- 
ferent ethical  code  of  its  own  ;  and  the  very  point  we 
have  to  decide  is,  which  of  these  several  standards  is  the 
best.  Or  shall  we  judge  a  law  by  its  effect  on  the  happi- 
ness of  the  human  race  as  a  whole  ?  The  difficulty  of 
measuring  happiness  of  groups  of  men  renders  this 
standard  wholly  unpractical  except  in  a  very  limited 
range  of  cases.  Or  shall  we  try  to  discover  in  which 
direction  human  evolution  is  tending,  and  call  a  thing 
good  or  bad  according  as  it  perpetuates  itself  by  conform- 
ing to  this  tendency  or  destroys  itself  by  resisting  it  ? 
This  is  the  standard  which  Hegel,  Comte,  and  Darwin, 
*  Herbert  Spencer,  "The  Man  versus  The  State,"  1884. 


THE   STRUGGLE  FOR  EXISTENCE.  ig 

each  in  their  several  ways,  have  gradually  taught  the 
modern  world  to  apply  and  accept. 

The  modern  observer  sees  in  human  history,  no  less 
than  in  natural  history,  the  record  of  a  process  of  elimina- 
tion and  survival.  He  sees  that  laws  and  institutions  no 
less  than  genera  and  species  are  the  result  of  natural 
selection  instead  of  being  ordained  by  Providence  for  all 
time.  He  sees  that  the  explanation,  not  to  say  the  justi- 
fication, of  national  customs  and  feelings  must  be  sought 
in  the  historical  reasons  for  their  survival.  The  modern 
world  is  coming  to  look  at  history  as  a  record  of  a  struggle 
between  different  ideas  and  different  institutions,  whose 
issue  is  chiefly  decided  by  the  moral  qualities  of  the  con- 
testing races  and  has  its  chief  importance  in  determining 
the  moral  standards  of  those  races  in  the  immediate 
future. 

§  22.  The  struggle  for  existence  among  men  is  probably 
quite  as  severe  as  that  among  the  lower  forms  of  organic 
life.  Among  men  as  among  animals  or  plants,  we  find  a 
number  of  young  brought  into  being  which  is  far  in  ex- 
cess of  the  number  that  reaches  maturity.  We  have  a 
constant  process  of  elimination  of  the  weak  and  selection 
of  the  strong  ;  a  process  by  whose  workings  we  may  ex- 
plain the  formation  of  different  types  of  man,  as  we  have 
learned  to  explain  the  origin  of  species  in  plants  or 
animals.  In  some  respects  the  application  of  the  doctrine 
of  natural  selection  to  human  history  is  easier  and  clearer 
than  its  application  to  biology.  In  biology,  no  satisfac- 
tory explanation  has  been  given  of  the  preservation  of  ac- 
quired characteristics.  Whether  we  hold  with  Darwin  that 
they  are  transmitted  by  heredity,  or  with  Weissmann  that 
they  are  not  thus  transmitted,  our  reasoning  is  in  either 
case  beset  with  difficulties.  But  the  student  of  human 
history  is  troubled  with  no  such  dilemma.  Imitation  and 
education  will  account  for  the  perpetuation  among  the 
children  of  the  useful  qualities  which  their  fathers  have 


20  PUBLIC  AND  PRIVATE  WEALTH. 

developed,  and  for  the  quick  suppression  of  some  qualities 
which  have  proved  disastrous,  without  the  necessity  of 
calling  in  the  aid  of  any  doubtful  theory  of  heredity. 

§  23.  But  while  the  intensity  of  the  struggle  is  the 
same,  the  conditions  under  which  it  is  waged  are  different 
in  certain  important  respects.  In  the  first  place,  the 
human  struggle  for  existence  is  between  groups  more 
than  between  individuals.  In  the  second  place,  it  is  a 
struggle  for  domination  more  than  for  annihilation, — a 
struggle  which  has  in  it  the  possibility  of  losing  part  of  its 
character  as  a  strife  and  giving  place  to  an  arrangement 
for  mutual  service  between  those  whose  interests  at  first 
seemed  to  conflict.  Neither  of  these  things  is  wholly 
confined  to  the  human  race.  All  the  higher  animals 
make  some  sort  of  arrangements  for  the  protection  of 
their  young  until  they  reach  years  of  maturity.  They 
have  some  measure  of  family  life,  in  which  one  or  both 
parents  will  readily  sacrifice  themselves  for  the  preserva- 
tion of  their  offspring ;  so  that  the  struggle  is  to  a  certain 
extent  for  the  preservation  of  families  rather  than  of 
individuals.  In  a  great  many  cases  larger  groups  of 
animals  band  themselves  together  for  mutual  defence  and 
support,  so  that,  within  the  limits  of  the  group  or  herd, 
cooperation  takes  the  place  of  conflict.  In  a  few  cases, 
especially  among  the  higher  forms  of  articulate  life  {e.  g. 
ants),  we  even  find  domination  substituted  for  annihilation 
as  the  result  of  the  struggle  between  races.  The  race  of 
ants  which  has  proved  stronger  in  the  fight  no  longer 
regards  the  members  of  the  weaker  race  as  rivals  to  be 
killed,  but  as  helpers  to  be  utilized  in  labor  for  which  the 
fighting  race  is  unfitted.  Under  such  circumstances  we 
find  institutions  and  usages  which  are  in  many  respects 
strikingly  like  those  of  semi-civilized  man. 

§  24.  What  really  distinguishes  the  evolution  of  human 
habits  and  institutions  from  those  of  the  beaver  or  the  ant 
is  that  their  progress  and  differentiation  are  not  accom- 


E  VOL  UTION  IN  HUM  A  N  SOCIE  TV.  21 

panied  by  changes  of  corresponding  importance  in  the 
physical  structure  of  the  members  of  the  race.  The  fight- 
ing ant  is  of  a  different  species  from  the  working  ant.  All 
its  physical  characteristics  are  different.  They  cannot 
have  a  common  offspring.  But  the  fighting  man  and  his 
slaves  belong  to  the  same  species.  Their  races  can  and  do 
mix.  Their  physical  characteristics  are  strikingly  alike. 
The  development  of  distinctive  habits  and  usages  among 
the  lower  animals  is  coincident  with,  and  probably  in- 
cidental to,  obvious  changes  of  physical  structure.  But  in 
man  the  variations  of  habit  and  usage  are  the  conspicuous 
phenomena,  while  the  variations  of  physical  structure  are, 
by  comparison,  neither  permanent  nor  important. 
Among  the  lower  types  of  organic  life,  instances  where 
domination  rather  than  annihilation  is  the  outcome  of  the 
struggle  for  existence  are  marked  by  sharp  structural 
distinctions  between  the  groups  involved ;  distinctions 
which  are  even  more  conspicuously  marked  in  groups 
which  render  mutual  service  without  one-sided  domina- 
tion. In  the  lower  forms  of  life  this  is  almost  confined  to 
organisms  that  stand  wide  apart — e.g:,  flowers  and  insects. 
But  in  the  human  race  it  is  most  fully  developed  among 
those  who  stand  nearest  together  in  their  plane  of 
civilization,  and  who  in  their  physical  characteristics 
would  seem  to  be  designed  for  rivals  rather  than  helpers. 
§  25.  There  may  have  been  a  time  at  the  beginning  of 
its  existence  when  the  human  race  lived  in  isolated  fami- 
lies ;  when  its  organization  was  like  that  of  the  lion  rather 
than  that  of  the  wolf.  The  evidence  on  this  subject  is 
quite  untrustworthy.  But  the  earliest  and  lowest  races 
of  humanity  about  which  we  can  safely  generalize  are 
conspicuously  gregarious.  The  horde  is  the  unit,  and  not 
the  family.  There  seems  to  be  no  reason  for  modifying 
the  old  word  of  Aristotle,  that  man  is  a  political  animal, 
and  that  the  man  without  a  community  is  either  less  than 
man  or  more. 


22  PUBLIC  AND   PRIVATE  WEALTH. 

When  we  have  a  struggle  for  existence  between  com- 
munities,  we  no  longer  find  the  stronger  individuals  pre- 
served at  the  expense  of  the  weaker.  It  is  the  stronger 
form  of  organization  which  survives;  or  perhaps  we  can 
better  say  that  survival  proves  which  of  the  forms  of 
organization  is  the  stronger.  We  have  a  natural  selection 
of  ethical  types  rather  than  physical  ones.  In  fact  the 
very  strength  of  the  bonds  which  hold  the  organization 
together  may  prevent  the  elimination  of  weal^er  individu- 
als and  pave  the  way  for  physical  degeneration  of  the  race 
as  a  whole  ;  realizing  Goethe's  fear  that  the  world  would 
turn  into  a  vast  hospital  where  the  best  energies  of  the 
strong  would  be  taxed  to  take  care  of  the  weak. 

§  26.  To  avoid  this  danger,  which  becomes  more  immi- 
nent as  civilization  advances,  every  good  organization 
provides  for  a  certain  amount  of  struggle  within  the  group 
itself.  Such  a  struggle  between  individuals  is  of  im- 
portance, in  order  to  prevent  the  group  type  from  becom- 
ing so  rigid,  and  its  laws  and  customs  so  inflexible,  as  to 
render  it  unable  to  adapt  itself  to  changed  conditions. 
But  these  conflicts  within  the  group  are  to  be  regarded 
as  means  for  preserving  the  whole  group  and  making  it 
strong.  Where  an  institution  gives  the  best  individuals 
the  chance  to  set  the  pace  for  the  whole  community  and 
force  it  up  to  their  level,  it  affords  to  the  race  that 
enjoys  it  an  advantage  in  the  struggle  for  existence ; 
where  it  gives  them  the  chance  to  exalt  themselves  by 
pushing  down  their  fellows,  it  has  an  opposite  effect.  The 
individual  conflict  must  be  judged  as  good  or  bad  accord- 
ing to  its  bearings  on  the  outcome  of  the  race  conflict.  If 
the  individualist  can  show  that  freedom  will  really  con- 
tribute to  the  success  of  a  nation  or  community  in  its 
struggle  for  existence  with  rival  nations  or  communities, 
no  one  is  likely  to  dispute  the  advantages  of  freedom. 
If,  however,  the  socialist  can  show  that  this  freedom  en- 
riches a  few  in  the  nation  at  the  expense  of  the  many. 


ECONOMICS  AND  ETHICS.  23 

and  thus  makes  any  increase  in  material  wealth  a  source 
of  weakness  rather  than  of  strength,  his  criticism  and  de- 
mand for  change  will  be  accepted.  No  economist  of  repu- 
tation at  the  present  day  would  attempt  to  ignore  the 
ethical  aspects  of  an  institution,  as  might  have  been  done 
fifty  years  ago.  Instead  of  asserting  the  complete  inde- 
pendence of  economics  and  ethics,  the  modern  economist, 
whether  individualist  or  socialist,  would  insist  on  the  close 
connection  between  the  two  sciences.  He  would  say  that 
nothing  could  be  economically  beneficial  which  was  ethi- 
cally bad,  because  such  economic  benefit  could  be  only 
transitory.  He  would  insist  with  equal  force  that  nothing 
could  be  ethically  good  which  was  economically  disastrous, 
because  in  this  case  also  destruction  must  ensue  with 
equal  certainty.  The  economist  must  understand  the 
ethical  bearings  of  the  results  which  he  discusses  ;  the 
moralist  must  understand  the  economic  consequences  of 
the  action  which  he  advocates. 

§  27.  Now  that  the  world  has  come  to  recognize  the 
true  position  and  importance  of  economic  history,  it  is 
useless  to  try  to  divide  the  economists  of  today  into  de- 
ductive and  historical  schools,  according  as  they  employ 
one  method  or  the  other.  Every  good  economist  now 
employs  both  methods  by  turns;  being  guided  in  his 
choice  by  the  character  of  the  problem  he  is  investigat- 
ing. The  old  antithesis  between  deductive  and  historical 
schools  is  giving  place  to  a  distinction  between  static 
and  dynamic  problems.  In  a  static  problem  we  assume 
that  the  character  and  institutions  of  a  people  remain 
fixed  while  the  relations  between  the  individual  members 
change.  In  a  dynamic  problem  we  take  account  of  the 
progressive  changes  in  national  character  which  result 
from  the  altered  conditions  of  individuals.  If  the  econo- 
mist takes  human  nature  and  human  society  as  he  finds 
them  in  the  most  civilized  communities,  with  all  their 
habits   and    their   motives,    their   institutions   and    their 


24  PUBLIC  AND  PRIVATE  WEALTH. 

theories,  and  on  the  basis  of  this  assumption  inquires 
what  will  be  the  effect  of  any  proposed  line  of  action 
upon  the  production  and  distribution  of  wealth,  and  the 
general  well-being  of  society,  this  is  called  the  deductive 
method  of  investigation.  It  deduces  consequences  from 
a  given  set  of  social  conditions;  it  is  the  method  chiefly 
used  in  dealing  with  static  problems.  But  the  economist 
may  go  one  step  farther  back  and  inquire  how  these  mo- 
tives and  institutions  have  arisen  ;  how  far  they  are  them- 
selves capable  of  modification  ;  what  causes  at  the  present 
day  may  be  contributing  to  modify  them.  This  is  called 
the  historical  method  of  inquiry,  and  is  of  special  impor- 
tance in  the  study  of  dynamic  problems. 

§  28.  Most  of  the  every-day  work  of  economists  involves 
the  deductive  method  rather  than  the  historical.  If  we 
ask  why  the  price  of  wheat  is  falling ;  or  why  wages  are 
high  in  a  certain  locality  ;  or  what  is  the  probable  effect 
of  a  proposed  tax  law  upon  production  and  prices  ;  or  how 
the  various  classes  in  the  community  are  influenced  by  the 
use  of  silver  as  money  ; — we  take  human  nature  as  we  find 
it,  and  consider  how  commercial  motives  operate  in  affect- 
ing demand  and  supply  in  various  lines  of  industry.  But 
in  the  more  difficult  questions  which  involve  moral  judg- 
ment, the  historical  method  must  be  combined  with  the 
deductive.  If  we  ask  whether  trades-unions  are  a  good 
thing  or  a  bad  thing,  it  is  not  enough  to  consider  their 
momentary  effect  on  wages,  prices,  and  demand  for  labor. 
We  must  study  this  carefully ;  but  we  must  also  study 
something  more.  We  must  look  at  the  educational  effect 
of  such  organizations  upon  successive  generations  of 
workmen  and  capitalists.  Have  they,  in  actual  history, 
been  wisely  or  unwisely  led  ?  Have  they  taught  work- 
men to  do  better  work  or  worse  work  than  was  obtained 
by  free  competition?  Have  they  secured  a  more  equita- 
ble distribution  of  wealth  among  the  members  of  the  com- 
munity ?     Are  they  likely  to  mitigate  or  to  intensify  those 


HISTORICAL  ME THOD  OF  INQ UIR  V.  2$ 

conflicts  between  capital  and  labor  which  form  such  a 
source  of  social  weakness  in  the  present  economic  system  ? 
All  these  questions  must  be  answered,  and  the  probable 
gains  and  losses  carefully  balanced,  before  we  are  in  a 
position  to  pass  judgment  on  the  question  in  its  most 
fundamental  aspect.  In  a  broad  problem  of  this  kind,  de- 
ductive economics  and  deductive  ethics  are  equally  help- 
less. The  two  sciences  must  be  studied  historically  in 
connection  with  one  another. 


CHAPTER  II. 

ECONOMIC    RESPONSIBILITY. 

Slavery  —  Property  —  Emancipation  —  The    Persistence   of   Poverty  — The 
Malthusian  Theory — Poor  Relief — Compulsory  Insurance. 

For  a  fuller  account  of  the  sociological  basis  of  economics  the  reader  is 
referred  to  F.  H.  Giddings,  "  Principles  of  Sociology,"  New  York,  1896. 
A.  Wagner,  "  Grundlegung  "  (vol.  i.  of  his  "  Lehrbuch  der  Politischen  Oeko- 
nomie  "),  3d  ed.,  Leipzig,  1893  ;  and  A.  Loria,  "  Les  Bases  Economiques  de 
la  Constitution  Sociale,"  Paris,  1893,  may  be  read  with  advantage.  The  lat- 
ter deals  with  economic  history  from  a  distinctly  socialistic  standpoint. 

J.  Bonar  :   "  Malthus  and  his  Work,"  London,  1885. 

H.  Fawcett :    "  Pauperism,"  London,  1871. 

G.  Drage :  "The  Unemployed,"  London,  1894;  "The  Aged  Poor," 
London, 1895. 

§  29.  Primitive  man  seems  to  have  lived  in  much  the 
same  way  as  did  the  animals  about  him.  He  obtained 
his  food  by  hunting,  by  fishing,  or  by  consuming  such  vege- 
table products  as  lay  ready  to  his  hand  ;  in  other  words, 
by  the  destruction  of  the  lower  forms  of  organic  life.  But 
as  civilization  began  to  develop,  he  learned  to  utilize 
animals  and  plants  instead  of  destroying  them.  Instead 
of  killing  all  the  animals  which  he  captured  in  the  chase, 
he  found  that  they  could  se?ve  him  more  usefully  by  be- 
ing domesticated.  Some,  like  the  dog  or  the  horse,  could 
assist  him  in  hunting  and  increase  the  certainty  of  spoils. 
Some,  like  the  goat  or  the  cow,  could  give  him  a  steady 
supply  of  milk.  Some,  like  the  sheep,  could  be  made  to 
multiply  their  numbers,  and   give  an    assured    source  of 

26 


{ 


DESTA'UCTION  OR  DOMINATION.  2/ 

warmth  in  time  of  cold  and  a  reserve  of  food  when  hunt- 
ing or  fishing  proved  unproductive.  A  h'ttle  later  he 
learned  to  utilize  plants  as  well  as  animals.  Instead  o^ 
eating  all  the  fruit  which  he  found,  semi-civilized  man 
saved  a  part  for  seed,  and  had  more  to  eat  during  the 
coming  year.  Instead  of  destroying  the  means  of  food 
supply  that  nature  furnished,  he  took  care  to  replace  them 
in  increasing  numbers.  Instead  of  seeking  income  only, 
he  began  to  accumulate  capital,* 

§  30.  This  change  in  his  attitude  toward  the  lower 
forms  of  life  paved  the  way  for  a  change  in  his  attitude 
toward  his  fellow-men.  When  a  tribe  of  men  lived  by 
hunting,  it  looked  upon  the  members  of  other  tribes  as 
rivals,  to  be  killed,  if  not  eaten.  So  late  as  Roman  times 
a  stranger  {Jiostis)  was  synonymous  with  an  enemy. 
Where  the  available  food  supply  was  small,  every  addi- 
tional mouth  was  a  positive  evil.  As  a  consequence  the 
wars  between  different  tribes  were  wars  of  extermination. 
Prisoners  could  not  be  taken  ;  for  the  only  way  in  which 
they  could  support  themselves  was  by  hunting,  and  if 
they  were  given  weapons  to  hunt  with,  they  might  use 
them  to  the  destruction  of  their  conquerors.  In  a  state 
of  society  like  this  female  captives  were  occasionally 
spared  ;  male  captives  almost  never,  unless  for  some  very 
exceptional  reasons  the  conquerors  were  prepared  to  adopt 
the  captive  as  a  member  of  their  own  tribe. 

But  when  the  domestication  of  animals  and  the  cultiva- 
tion of  plants  came  into  use,  the  case  was  altered.  The 
captives  could  be  employed  to  perform  labor  which  was 
disagreeable  to  their  conquerors.  This  labor  required  no 
weapons  and  did  not  render  the  slaves  dangerous  ;  though 
we  find  some  tribes  where  captives  were  habitually  blinded 
as  a  precaution  against  insurrection,  as  in  Herodotus' 
description  of  the  Scythians.  The  more  the  arts  ad- 
vanced, the  greater  was  the  opportunity  to  utilize  such 
'  In  the  public  sense — not  as  yet  in  the  private  sense. 


28  ECONOMIC  RESPONSIBILITY. 

unwarlike  labor  and  the  larger  was  the  proportion  of 
captives  whose  lives  were  spared. 

Such  was  the  origin  of  slavery.  As  compared  with  the 
conditions  that  preceded  it,  it  represented  a  positive 
gain  for  humanity.  From  the  standpoint  of  the  captive, 
it  was  better  to  be  spared  even  for  a  life  of  hard  labor 
than  to  be  put  to  death  without  mercy.  From  the  stand- 
point of  the  conqueror,  it  was  an  intellectual  and  moral 
advance  to  forego  the  cruel  delight  of  torturing  enemies 
for  the  sake  of  the  future  advantages  to  be  obtained  from 
mastery  over  their  persons  and  powers.  From  the  stand- 
point of  the  community  as  a  whole,  it  was  an  immeasurable 
gain  to  have  labor  exercised  continuously  for  a  remote 
end,  even  though  it  was  bestowed  grudgingly  and  under 
compulsion. 

§  31.  Those  who  look  at  the  virtues  of  free  communi- 
ties, and  the  vices  which  develop  in  connection  with  the 
system  of  slavery,  are  often  tempted  to  regard  its  intro- 
duction as  a  degradation  of  society.  Even  if  they  admit 
that  the  new  system  enables  a  great  many  people  to  live 
who  would  otherwise  have  been  put  to  death,  they  think 
that  this  is  accompanied  by  a  lowering  of  the  average 
moral  standard  of  the  community.  There  is  much  super- 
ficial reason  for  this  view.  Where  all  men  were  free,  and 
all  skilled  in  the  use  of  arms,  there  was  universal  self- 
reliance  and  self-respect.  Where  each  man  by  the  same 
token  was  able  to  protect  the  honor  of  his  daughter,  sister, 
or  wife,  there  was  frequently  a  high  degree  of  respect  for 
women.  But  these  merits  were  outweighed  by  an  in- 
security which  rendered  progress  impossible.  So  much 
of  the  strength  of  the  community  had  to  be  spent  in 
fighting,  that  there  was  little  opportunity  for  present 
comfort  and  no  chance  to  lay  the  foundation  for  future 
improvement.  The  rose-colored  view  of  the  life  of  free 
communities  which  people  held  a  few  years  ago  is  no 
longer  universally  accepted.     Great  as  were  the  disadvan- 


\ 


SLAVE  LABOR.  2g 

tages  attending  it,  there  is  reason  to  believe  that  the  con- 
dition of  serfdom  gave  to  the  majority  of  the  people  who 
lived  under  it  a  positive  advance  in  present  enjoyment 
and  in  possibility  of  increased  future  enjoyment.  The 
mediaeval  villein  who  had  to  give  half  his  time  to  the  ser- 
vice of  a  feudal  lord  was  better  off,  materially  at  any  rate, 
than  a  man  who,  though  nominally  free,  had  to  spend  half 
of  his  working  time  in  self-protection,  and  who  even  on 
those  terms  could  not  protect  his  family  from  outrage, 
nor  the  results  of  his  labor  from  arson  and  pillage.' 

§  32.  But  while  slave  labor  marked  an  advance  over  the 
conditions  which  had  preceded  it,  it  was  far  from  being  a 
good  system  according  to  modern  standards.  It  was 
better  than  no  labor  at  all.  This  was  about  all  that  could 
be  said  in  its  favor.  If  people  would  not  work  except  on 
compulsion,  it  was  a  good  thing  for  society  to  have  that 
compulsion  exercised.  But  the  result  was  at  best  un- 
satisfactory. The  slave  tended  to  keep  his  product  at  a 
minimum.  He  was  compelled  by  the  overseer  to  do  a 
certain  amount ;  he  had  no  inducement  to  do  more  than 
that  amount.  He  had  reason  to  believe  that  his  master 
would  be  forced  by  self-interest  to  allow  the  slave  enough 
to  keep  him  alive  ;  he  was  still  surer  that  the  master  would 
not  allow  him  more  than  this.  Any  extra  exertion  or  care 
redounded  to  the  profit  of  the  master,  not  of  the  slave. 
The  inevitable  result  was  low  efficiency  and  great  waste. 
The  more  complicated  the  work  to  be  done,  the  less  was 
the  chance  of  avoiding  these  evils.  A  slave-driver  could 
compel  those  who  were  subjected  to  his  rule  to  perform  a 
certain  amount  of  physical  labor :  but  he  could  not  com- 
pel them  to  exercise  intelligence  or  zeal.  These  were  only 
to  be  secured  when  the  hope  of  reward  came  in  to  supple- 
ment or  take  the  place  of  the  fear  of  punishment.     When 

'  Modem  historical  criticism  has  cast  doubt  on  the  idea,  so  universally  held 
a  short  time  ago,  that  the  development  of  feudalism  supplanted  a  system  of 
free  and  prosperous  village  communities. 


30  ECONOMIC  RESPONSIBILITY. 

the  habit  of  labor  and  the  capacity  for  labor  were  suffi- 
ciently developed  in  a  race  of  men,  the  institution  of 
property  furnished  a  far  more  potent  means  of  getting 
work  done  for  society  than  did  the  institution  of  slavery. 
While  it  allowed  the  shiftless  men  to  do  a  little  less,  it 
encouraged  the  prudent  and  ambitious  to  do  a  great  deal 
more. 

§  33.  It  must  not  be  supposed  that  property  rights 
originated  in  considerations  of  this  kind.  Though  the 
institution  of  property  is  a  most  important  motive  to  the 
zealous  and  intelligent  application  of  labor,  it  was  not  de- 
vised for  this  purpose.  The  earliest  property  rights  were 
based  on  occupancy  rather  than  on  labor.  They  were  a 
recognition  of  the  power  of  the  strong  man  to  retain  what 
he  had  seized,  not  of  the  right  of  the  industrious  man  to 
enjoy  what  he  had  produced.  We  may  fairly  grant  the 
claim  of  the  socialist  that  capital  originated  in  robbery. 
In  like  manner,  labor  originated  in  slavery.  Neither  fact 
has  any  appreciable  bearing  on  present  issues.  Neither 
fact  tends  in  the  least  to  prove  either  that  the  capitalist 
is  a  thief  or  the  laborer  an  inferior. 

§  34.  At  first,  property  seemed  indistinguishable  from 
possession.  The  so-called  property-rights  of  uncivilized 
tribes  are  for  the  most  part  customs  regulating  the  claims 
conferred  by  possession,  rather  than  guarantees  of  per- 
manent ownership.  True  property  right  is  something 
quite  distinct  from  the  fact  of  possession  or  from  the 
claims  which  such  possession  gives  the  occupant.  It  in- 
volves a  recognition  on  the  part  of  the  community  that 
some  individual  or  group  of  individuals  has  permanent 
authority  over  certain  objects,  whether  he  is  actually 
using  them  or  not.  In  the  hunting  stage  of  society  there 
was  very  little  property  right,  because  most  of  the  useful 
objects  took  the  form  of  food  for  immediate  consumption 
or  clothing  and  weapons  for  continuous  use.  In  any  of 
these  cases  the  fact  of  possession  was  the  important  matter 


ORIGIN  OF  PROPERTY  RIGHTS.  3 1 

and  established  a  right  of  use.  A  man  was  left  in  posses- 
sion of  the  things  which  he  himself  made,  used,  and  con- 
sumed. But  the  same  progress  in  the  arts  which  gave 
the  chance  for  labor  and  paved  the  way  for  slavery,  gave 
rise  to  questions  of  ownership  and  to  a  more  complex 
system  of  property  rights.  Whenever  there  was  an  alter- 
native between  domination  and  destruction,  as  in  taming 
an  animal  instead  of  eating  it,  or  in  sparing  a  prisoner  of 
war  instead  of  killing  him,  it  was  necessary  to  strengthen 
the  motives  which  should  lead  people  to  sacrifice  obvious 
present  enjoyment  for  the  sake  of  large  future  advantage 
to  the  community.  An  animal  was  far  more  likely  to  be 
domesticated  if  the  man  who  had  captured  it  v/as  allowed 
special  and  enduring  rights  to  its  use.  The  prisoner  of 
war  was  far  more  likely  to  be  spared  by  his  captor  if  that 
captor  was  assured  that  the  slave  would  be  recognized  as 
belonging  permanently  to  him  rather  than  to  the  com- 
munity as  a  whole. 

§  35.  Such  ancient  property  rights  are  for  the  most  part 
not  well  earned,  according  to  modern  standards.  They 
are  due  to  force  more  than  to  labor.  The  men  who  enjoyed 
the  most  property  were,  as  a  rule,  the  successful  fighters 
rather  than  the  industrious  workers.  But  such  a  system 
of  property,  in  spite  of  its  apparent  violations  of  justice, 
has  served  an  important  purpose.  It  marks  the  beginning 
of  a  higher  civilization.  It  enables  the  races  that  have 
lived  under  it  to  reach  a  higher  stage  of  material  and 
moral  development  than  their  rivals  who  have  had  no 
such  system. 

In  the  first  place,  it  tends  to  the  preservation  of  useful 
things.  It  causes  domination  to  take  the  place  of  extinc- 
tion as  a  habit  in  peace  and  a  purpose  in  war.*  It  gives 
the  race  a  larger  amount  of  accumulated  wealth  of  every 
sort  ;  and  this  wealth,  though  primarily  enjoyed  by  a  few 

'  Compare  O.  Effertz,  "  Katechismus  der  Politischen  Oekonomik,"  Bonn, 
1893.     Lieferung  III. 


32  ECONOMIC  RESPONSIBILITY. 

who  have  perhaps  done  least  to  merit  it,  nevertheless  con- 
tributes to  the  strength  and  security  of  the  whole  people 
and  their  possibilities  of  enjoyment  in  the  future.  Insecu- 
rity of  tenure  makes  wealth  likely  to  be  destroyed.  It 
was  noticed  in  the  American  Civil  War  that  when  a  regi- 
ment was  ordered  to  leave  a  camping  ground  which  it  had 
gradually  made  comfortable,  a  fire  was  almost  certain  to 
arise  which  would  consume  all  the  non-portable  improve- 
ments. 

§  36.  In  the  second  place,  property  right,  even  when 
based  upon  force,  creates  a  class  of  men  more  or  less 
removed  from  the  immediate  pressure  of  poverty.  The 
man  who  holds  accumulated  wealth  can  use  it  for  the  per- 
manent advantage  of  himself  and  his  children,  and  enable 
them  to  develop  physically  and  mentally  in  the  face  of 
industrial  vicissitudes  which  would  otherwise  bring  the 
whole  community  to  the  verge  of  starvation.  Property 
of  this  kind  is  accumulated  not  for  the  individual  alone, 
but  for  his  family.  Its  development  is  associated  with 
the  development  of  modern  family  life.  It  paves  the  way 
for  a  progressive  advance  of  the  members  of  a  family  from 
generation  to  generation.  By  exempting  the  children  of 
the  fortunate  few  from  the  burdens  of  want  which,  if 
equally  shared,  would  drag  the  whole  race  down,  it 
allows  them  to  advance  and  to  pave  the  way  for  a  similar 
advance  on  the  part  of  others.  The  desire  to  make  pro- 
vision for  one's  children  is  not  merely  a  potent  motive  for 
the  preservation  of  property,  but  a  powerful  means  for 
giving  free  room  to  the  process  of  natural  selection  of  the 
types  most  fit  for  permanent  strength  and  survival. 

§  37.  In  the  third  place,  such  accumulations  of  prop- 
erty, combined  as  they  are  with  family  life  and  family 
feeling,  create  a  conservative  class  in  the  community 
which  stands  on  the  side  of  law  rather  than  of  violence,  of 
construction  rather  than  of  destruction.  If  a  strong  man 
has  no  property,  he  has  everything  to  gain  and  nothing 


EXTENSION  OF  PROPERTY  RIGHTS.  33 

to  lose  by  the  constant  prevalence  of  petty  warfare.  If, 
however,  he  has  useful  rights  which  he  wishes  society  to 
recognize,  and,  above  all,  if  he  desires  a  permanent  recog- 
nition of  those  rights  for  his  children  as  well  as  for  him- 
self, his  powers  are  enlisted  on  the  side  of  tranquillity  and 
permanence  rather  than  on  that  of  war  and  change.  He 
is  interested  in  giving  increased  power  to  law  and  to  the 
sentiment  of  respect  for  law ;  a  process  which,  as  it  is  car- 
ried toward  its  completion,  must  work  for  the  benefit  of 
the  weak  quite  as  much  as  for  that  of  the  strong.  Even 
if  his  property  right  was  originally  based  upon  acts  of 
violence,  he  is  led  to  discourage  the  continuance  of  this 
method  of  acquisition  among  his  immediate  neighbors, 
and  to  make  usage,  rather  than  force,  the  basis  on  which 
society  is  to  recognize  rights  of  possession. 

§  38.  If  this  point  has  been  reached,  and  the  strong 
man  appeals  to  customary  rights  among  his  neighbors,  it 
is  but  a  short  step  to  the  recognition  of  such  customary 
rights  among  his  slaves.  Whether  a  nation  takes  this 
step  or  not  depends  very  largely  upon  its  foreign  relations. 
If  these  are  such  that  the  supply  of  slaves  from  abroad 
continues  rapid  and  steady,  the  acknowledgment  that 
slaves  have  rights  makes  little  progress.  The  old  slaves 
are  worked  to  death,  new  ones  take  their  place,  and  there 
is  no  room  for  the  creation  of  a  traditional  status  which 
slave  laborers  may  inherit  from  generation  to  generation. 
Even  among  the  most  civilized  nations  of  antiquity  the 
progress  of  emancipation  was  slow  as  long  as  wars  of  con- 
quest were  matters  of  every-day  occurrence.  The  Romans 
created  a  system  of  property  right  which  enabled  them  to 
accumulate  wealth,  to  develop  an  aristocratic  class,  and  to 
secure  the  highest  degree  of  law  and  order  within  the 
Roman  dominions ;  but  it  was  a  long  time  before  the 
slaves  obtained  much  benefit  from  this  process,  because 
slave  labor  from  abroad  was  so  readily  obtained  by  con- 
quest.    In  mediaeval   Europe,  on   the  other  hand,  while 


34  ECONOMIC  RESPONSIBILITY. 

there  was  much  less  accumulation  of  wealth  and  much 
less  respect  for  law,  there  was  far  more  rapid  recognition 
of  civil  rights  on  the  part  of  the  laborers  who  were  actu- 
ally engaged  in  the  production  of  wealth.  It  is  true 
that  these  rights  were  by  no  means  accurately  defined. 
Serfs  could  be  sold  into  foreign  parts,  and  different  mem- 
bers of  families  separated  from  one  another  by  such 
sale,  to  a  far  greater  degree  than  is  generally  supposed. ' 
But  a  custom  grew  up  and  grew  stronger  from  generation 
to  generation,  rendering  such  infringements  of  personal 
liberty  more  and  more  rare  as  time  went  on.  In  mediaeval 
serfdom,  as  we  generally  see  it  in  western  Europe  from 
the  twelfth  to  the  fifteenth  century,  the  villein  was  bound 
to  labor  for  his  lord  a  certain  number  of  days,  and  on 
other  days  was  allowed  to  work  for  himself  or  for  his  own 
community  on  certain  lands  set  apart  for  that  purpose. 
He  had  thus  attained,  by  custom  rather  than  by  law,  a 
certain  measure  of  freedom  and  a  status  in  the  community 
which  placed  his  position  far  above  that  of  the  Roman 
slave. 

§  39-  Where  such  customary  rights  have  been  once 
established  and  no  new  sources  of  supply  of  slave  labor 
are  opened,  the  necessity  of  stimulating  production  causes 
the  workmen  to  be  given  proprietary  rights  in  the  pro- 
duct of  their  labor.  This  is  at  first  most  conspicuous  in 
manufacturing  industries.  A  few  skilled  workmen  collect 
in  a  town  where  they  can  defend  themselves  against  mili- 
tary aggression,  and  then  produce  goods  so  far  superior 
in  quantity  and  quality  to  the  product  of  their  enslaved 
competitors  that  the  feudal  lord  soon  comes  to  purchase 
goods  from  the  town  instead  of  relying  on  the  few  rude 
articles  which  can  be  made  on  his  own  domain.  The 
towns  thus  become  a  centre  of  free  trade  and  free  labor. 

§  40.  The    same    course  of  events  works  itself  out  in 

*  D'Avenel:  "  Histoire  Economique  de  la  Propriete,"  Paris,  1894,  pp. 
162/: 


EM  A  NCI  PA  TION.  35 

agriculture,  though  as  a  rule  more  gradually.  The  free- 
man working  for  himself  can  produce  so  much  more  than 
the  serf  that  there  is  a  chance  for  both  parties,  lord  and 
vassal,  to  gain  by  the  process  of  emancipation.  If  the 
amount  which  a  man  produces  in  a  day  when  he  works 
for  his  landlord  is  worth  a  halfpenny,  and  the  amount 
which  he  produces  when  he  works  for  himself  is  worth 
one  and  a  half  pence,  it  is  for  the  advantage  of  both  the 
landlord  and  the  laborer  to  make  a  contract  whereby  the 
laborer  agrees  to  pay  the  landlord  a  penny  in  lieu  of  each 
day's  labor  previously  rendered.  Such  a  contract  is  also 
advantageous  to  the  public  wealth  of  the  community  as  a 
whole,  by  causing  increased  food  supply  and  consequent 
increase  either  of  numbers  or  of  strength.  The  more  in- 
telligent and  ambitious  the  laborer,  the  greater  will  be 
the  difference  between  his  minimum  product  which  he 
creates  as  a  serf  and  his  maximum  product  which  he  can 
create  as  a  freeman  ;  the  greater,  therefore,  will  be  the 
possible  advantages  to  all  parties  from  emancipation. 
Hence  we  find  that  the  passage  from  slavery  to  freedom 
came  earliest  and  worked  itself  out  most  completely  in 
those  countries  where  the  general  ability  of  the  villein 
class  was  greatest.  In  England,  between  the  twelfth  and 
the  fourteenth  century,  there  was  a  rapid  change  in  the 
position  of  the  cultivators  of  the  soil,  whereby  money 
rents  of  small  amount  were  substituted  for  compulsory 
labor.'  On  the  continent  of  Europe  the  change  did  not 
take  place  so  soon,  nor  was  it  so  complete  when  it  came. 
Instead  of  agreeing  to  pay  a  certain  amount  of  money, 
as  was  generally  the  case  in  England,  the  continental 
peasants  usually  contracted  to  pay  a  certain  share  of  the 
product  to  the  owner  of  the  soil.  They  thus  gained  a 
part  of  the  benefit  of  their  industry  and  ambition,  instead 
of  the  whole.  This  system  of  share  rents,  whereby  the 
cultivator  gives  the  proprietor  a  percentage  of  the  pro- 

'  W.  J.  Ashley  :  "  English  Economic  History,"  chap.  i. 


36  ECONOMIC  RESPONSIBILITY. 

duct,  is  known  as  the  m,etayer  system.  Even  this  degree 
of  independence  was  not  attained  by  most  of  the  peas- 
antry in  central  Europe  until  the  close  of  the  last  century, 
while  in  Russia  the  system  of  serfdom  lasted  with  but 
slight  modifications  until  1863. 

§  41.  It  must  not  be  supposed  that  this  change  from 
slavery  to  free  labor  was  voluntarily  suggested,  or  even 
readily  accepted,  by  the  feudal  lords.  It  was  forced  upon 
them  by  the  conditions  of  the  struggle  for  existence  be- 
tween different  races  and  different  members  of  the  same 
race.  As  Europe  was  constituted  in  the  Middle  Ages, 
the  land  was  by  no  means  well  utilized.  Scarcely  any 
district  produced  anything  like  the  amount  of  food  and 
other  supplies  which  would  have  been  possible  under  a 
better  system  of  government.  As  long  as  warfare  was 
carried  on  with  rude  appliances,  this  lack  of  good  agricul- 
ture, however  injurious  to  the  comfort  of  the  mass  of  the 
people,  did  not  seriously  cripple  the  fighting  power  of  the 
privileged  classes.  But  with  the  improvements  in  military 
art,  which  rendered  capital  necessary  for  the  successful 
waging  of  war,  it  was  impossible  for  a  man  to  fight  to  ad- 
vantage unless  his  vassals  worked  to  advantage.  Where 
every  man  was  ready  to  fight  on  short  notice  and  armies 
could  be  supported  by  plundering  the  peaceful  inhabi- 
tants of  the  country  through  which  they  travelled,  whether 
friend  or  foe,  the  necessity  of  large  supplies  was  not 
clearly  manifest.  But  when  war  was  waged  on  such  a 
scale  that  a  campaign  involved  weeks  of  preparation  and 
days  of  occupancy  of  the  same  ground,  victory  was  apt 
to  rest  with  the  man  who  had  the  best  commissary 
service.  Under  these  circumstances,  the  race  that  could 
feed  and  clothe  its  army  on  the  largest  scale  had  an 
enormous  advantage  in  the  conflict,  and  one  which  gener- 
ally proved  decisive.  It  was  for  this  reason  quite  as  much 
as  for  any  other  that  we  find  kings  so  often  taking  the 
side  of  free  labor.     It  was  not  because  they  loved  serfs 


SUPERIORITY  OF  FREE  LABOR.  37 

and  hated  nobles,  but  because,  warring  on  a  large  scale, 
they  were  compelled  to  maintain  large  armies  and  to  give 
their  acquiescence  to  the  system  by  which  such  armies 
could  best  be  fed. 

§  42.  The  force  of  these  considerations  is  illustrated  by 
the  history  of  emancipation  in'  Russia  and  in  the  United 
States.  To  the  Russian  government,  the  Crimean  war 
had  proved  that  a  country  living  under  the  old  industrial 
order,  however  large  her  population  and  her  army,  could 
not  even  on  her  own  ground  cope  successfully  with  coun- 
tries which  enjoyed  modern  industrial  methods.  Emanci- 
pation thus  became  a  military  necessity.  In  the  United 
States  this  necessity  was  even  more  strikingly  emphasized, 
because  the  contending  parties  were  of  the  same  race  and 
on  the  same  general  level  of  civilization,  differing  only  in 
the  fact  that  the  North  relied  on  free  labor  and  the  South 
on  slave  labor.  The  contest  was  decided,  not  by  the 
direct  result  of  military  operations — for  if  we  look  at  bat- 
tles alone  the  victories  of  the  South  were  more  conspicu- 
ous than  those  of  the  North — but  by  the  fact  that  the 
North  was  able  to  maintain  her  supplies  of  every  neces- 
sary article  almost  unimpaired  by  the  stress  of  war,  while 
the  South  was  brought  low  by  continually  increasing  ex- 
haustion. The  war  was  not  decided  by  disparity  of  num- 
bers between  the  two  sections ;  for  this  disparity  was 
nearly  counterbalanced  by  the  advantage  which  the  South 
had  in  acting  on  the  defensive.  It  was  the  disparity  of 
industrial  systems  which  decided  the  issue  of  the  contest. 

§  43.  It  must  not  be  assumed  that  emancipation  is  a 
good  thing  for  every  man  or  for  every  race.  Compulsory 
labor  is  better  than  no  labor  at  all.  If  people  are  not 
ready  to  work  for  fear  of  starvation  tomorrow,  they  must 
be  forced  to  work  by  physical  compulsion  today.  If  they 
are  not  accessible  to  motives  of  ambition,  there  is  danger 
that  the  loss  by  the  introduction  of  free  labor  will  out- 
weigh the  gain.     Where  a  body  of  serfs  contributes  in 


38  ECONOMIC  RESPONSIBILITY. 

large  measure  to  the  working  out  of  its  own  emancipation, 
there  is  not  much  danger  of  this  result.  The  struggles 
necessary  to  obtain  freedom  form  the  best  preparation  for 
freedom  and  the  best  guarantee  that  it  will  be  wisely- 
used.  But  where  emancipation  is  imposed  from  above  by 
outside  power,  whether  from  motives  of  humanity  or  of 
self-interest,  there  is  great  danger  that,  for  the  time  being 
at  least,  the  losses  will  outweigh  the  gains.  The  emanci- 
pation of  the  slaves  in  South  American  countries  has  not 
always  contributed  to  the  commercial  prosperity  of  the 
countries  which  set  them  free  or  to  their  general  standard 
of  morality  and  efficiency.  Even  in  the  United  States  it 
seemed  for  many  years  questionable  whether  the  good 
resulting  from  the  abolition  of  slavery  would  outweigh 
the  evil.  A  population  which  had  never  worked  except 
under  immediate  compulsion  was  suddenly  given  the 
highest  degree  of  freedom.  To  a  considerable  part  of 
the  negro  race  this  freedom  meant  liberty  to  desert  their 
families  and  to  violate  all  contracts  for  continuous  work. 
For  many  years  the  free  labor  of  the  South  was  too 
uncertain  to  be  available  for  industries  requiring  unin- 
terrupted toil.  Iron  manufactures  failed  in  regions  con- 
spicuously well  adapted  for  iron  production,  because  no 
laborers  could  be  found  to  keep  a  furnace  in  blast  if  a 
circus  unexpectedly  appeared  in  the  next  county.  They 
were  ready  to  sacrifice  all  prospects  of  future  employment 
for  the  sake  of  the  day's  gratification.  Of  late  this  state 
of  things  has  changed  for  the  better.  The  increasing  de- 
velopment of  business  ability  among  the  leading  men  of 
the  South,  coupled  with  the  adaptability  and  docility  of 
most  of  the  negroes,  has  at  length  enabled  the  country 
to  secure  the  advantages  of  free  labor.  In  spite  of  many 
perplexing  problems  connected  with  increase  of  negro 
population,  the  worst  difficulties  of  emancipation  have 
been  evidently  surmounted. 

§  44.    In    Russia   the    result   is    not    nearly    so   good. 


LOCALIZATION  OF  POVERTY.  39 

Though  the  Russian  peasant  was  a  little  more  self-reliant 
than  the  negro  slave,  he  was  by  no  means  so  adaptable  to 
new  conditions.  Nor  were  the  Russian  nobility  fitted, 
either  by  power  or  by  inclination,  to  take  the  lead  in 
teaching  the  peasantry  good  business  habits.  Under 
such  circumstances,  the  condition  of  the  Russian  free 
peasant  today  seems  to  be  worse  than  that  of  the  serf  a 
generation  ago.  He  has  diminished  instead  of  increasing 
his  productiveness.  He  has  fallen  under  the  control  of 
the  money-lender,  who  proves  quite  as  hard  a  master  as 
the  old  noble.  Not  having  been  mentally  qualified  at  the 
start  to  avail  himself  of  the  advantages  which  emanci- 
pation offered,  he  has  gradually  sunk  into  a  position 
where  those  advantages  are  out  of  his  reach,  no  matter 
how  great  the  industry  or  the  ambition  which  he  might 
show.  People  differ  as  to  the  remedy  ;  but  there  is  a 
general  consensus  of  opinion  among  all  who  are  versed  in 
Russian  affairs  that  the  state  of  things  as  it  exists  at  pres- 
ent is  a  most  unsatisfactory  one,  and  that  emancipation 
has  failed  to  accomplish  the  good  which  was  expected. 

§  45.  The  gradual  progress  of  emancipation  widens 
the  circle  of  those  who  can  free  themselves  from  the  im- 
minent danger  of  poverty.  Instead  of  being  confined  to 
the  military  chieftain,  a  fair  degree  of  comfort  comes 
within  the  reach  of  a  large  number  of  men  of  industry  and 
ability.  Under  the  system  of  slavery,  the  worker  had  no 
inducement  to  increase  his  output  or  to  diminish  his  con- 
sumption. Under  the  system  of  free  labor,  each  increase 
in  the  amount  that  he  produces  and  each  diminution  in 
the  amount  that  he  consumes  goes  to  make  up  a  fund 
which  will  ensure  him  and  his  children  against  danger  of 
starvation.  Under  these  circumstances  there  is  a  force 
constantly  at  work  to  build  up  a  race  of  industrious  and 
prudent  men.  Poverty  is  by  no  means  abolished,  but  it 
is  localized.  The  ancient  world  was  constantly  in  dread 
of  famines  which  swept  away  large  sections  of  the  com- 


40  ECONOMIC  RESPONSIBILITY. 

munity  and  diminished  the  strength  of  those  that  sur- 
vived. Today  we  no  longer  regard  such  universal  misery 
as  a  probable  incident  of  economic  life.  When  there  is 
an  approximation  to  such  a  condition,  as  in  the  potato 
famine  in  Ireland  in  1846,  or  in  the  occasional  years  of 
great  distress  in  the  Russian  Empire,  it  is  due  to  excep- 
tional causes  which  have  prevented  the  laborer  from 
realizing  the  benefits  of  freedom.  In  the  most  advanced 
communities,  extreme  poverty  is  very  apt  to  be  associated 
with  gambling,  drinking,  or  general  shiftlessness.  The  un- 
fortunate but  deserving  poor,  though  still  far  too  numer- 
ous, are  the  exception  rather  than  the  rule. 

§  46.  While  it  is  true  that  poverty  persists  in  the 
midst  of  advancing  wealth,  it  is  not  true  that  it  increases, 
as  so  many  people  are  led  to  suppose.  Judged  by  the 
best  criteria  which  we  can  apply,  poverty  as  a  whole  is 
diminishing  rather  than  increasing.  Both  the  absolute 
standard  of  comfort  attained  by  the  average  laborer,  and 
the  share  of  national  income  which  goes  to  labor,  seem 
to  be  better  now  than  in  any  period  for  which  we  have 
adequate  data  for  comparison.  *  Perhaps  the  chief  reason 
why  the  evils  of  poverty  are  so  emphasized  in  modern 
times  is  to  be  sought  in  the  very  progress  which  has  local- 
ized poverty.  As  long  as  danger  of  starvation  was  re- 
garded as  the  common  lot  of  mankind,  from  which  only  a 
favored  few  were  exempt,  it  seemed  as  idle  to  complain 
of  poverty  as  it  was  to  complain  of  heat  or  cold.  But 
when  most  people  were  relieved  from  a  pressure  which 
was  formerly  wellnigh  universal,  the  lot  of  those  who  re- 
mained under  the  yoke  excited  commiseration  as  some- 
thing exceptional.     As    theories  of    political  and   social 

*  This  subject  is  further  developed  in  subsequent  chapters.  See  also  Rae  : 
"  Contemporary  Socialism,"  chapter  on  "Socialism  and  the  Social  Ques- 
tion." Atkinson  :  "  The  Distribution  of  Products,"  Part  i.  Reasonings  on 
either  side  of  this  question  based  on  uncritical  use  of  census  figures  are  quite 
worthless. 


THE  MALTHUSIAN   THEORY.  41 

equality  make  progress,  the  industrial  inequality  between 
richer  and  poorer  members  of  a  community  is  felt  to  be  a 
grievance.  Even  by  some  of  those  who  grant  that  the  sys- 
tem of  free  labor  has  tended  to  diminish  the  number  of 
the  poor,  the  fact  that  any  people  whatever  remain  poor 
and  out  of  work  is  made  an  indictment  against  it.  It  is 
felt  by  many  that  our  theories  of  political  equality  and 
our  sense  of  moral  duty  are  violated  if  any  man  who  is 
willing  to  work  cannot  obtain  the  chance  to  exercise  his 
powers  and  obtain  a  living  wage  by  so  doing.  Admitting, 
as  they  must,  that  much  of  the  poverty  is  due  to  causes 
for  which  the  poor  themselves  are  to  blame,  they  do  not 
feel  that  society  has  done  its  duty  as  long  as  any  man 
who  is  willing  to  work  is  deprived  of  the  opportunity. 

§  47.  This  view  was  subjected  to  sharp  criticism  by 
Malthus  at  the  close  of  the  last  century.*  He  made  a  sys- 
tematic attempt  to  prove  that  society  could  not  under- 
take to  provide  work  for  all  who  might  desire  it,  and  that 
poverty  was  a  necessary  incident  of  the  struggle  for  ex- 
istence rather  than  an  indictment  against  modern  society. 
It  is  of  the  utmost  importance  to  determine  the  truth  or 
error  of  the  Malthusian  theory.  According  as  we  accept 
or  reject  it  we  change  our  mental  attitude  toward  a  large 
number  of  schemes  of  social  reform.  If  poverty  is  inevi- 
table and  simply  represents  a  sacrifice  of  individuals  for 
the  sake  of  the  progress  of  the  race,  we  may  and  must 
view  with  resignation  a  number  of  evils  which  can  only  be 
made  worse  by  attempting  to  eradicate  them.  If,  on  the 
other  hand,  it  is  in  large  measure  a  preventable  thing,  then 
the  claims  of  our  present  civilization  to  favorable  judg- 
ment, in  the  matter  of  either  material  or  moral  prosperity, 
can  hardly  stand  for  a  moment. 

§  48.  The  Malthusian  theory,  in  brief,  is  that  popula- 
tion has  a  tendency  to  multiply  faster  than  subsistence, 
and  that,  under  such  circumstances,  some  people  will  neces- 
'  "Essay  on  the  Principle  of  Population,"  1798. 


42  ECONOMIC  RESPONSIBILITY. 

sarily  fail  to  have  the  food  they  need  ;  that  poverty  is 
therefore  inevitable  unless  the  race  as  a  whole  adopts  pre- 
ventive means  to  restrict  the  increase  of  its  numbers.  In 
the  absence  of  such  preventive  checks  to  population,  the 
Malthusian  holds  that  poverty  is  unavoidable,  and  that 
the  numbers  of  the  race  will  be  kept  down  by  vice  and 
misery, 

§  49.  In  order  to  understand  the  chain  of  proof  by 
which  this  theory  is  supported,'  let  us  look  at  the  rela- 
tions between  the  birth  and  death  rates  and  the  prosperity 
of  the  community  as  a  whole.  By  the  birth  rate,  as  it  is 
ordinarily  expressed  in  statistics,  we  mean  the  number  of 
births  per  thousand  inhabitants  per  year.  If  in  a  city  of 
100,000  inhabitants  the  records  show  300  births  in  a 
month,  we  say  that  this  represents  a  birth  rate  of  36,  be- 
cause the  same  number  continued  through  the  twelve 
months  would  make  3,600  in  a  year  for  the  whole  city  of 
100,000,  or  36  per  thousand.  The  physiological  possibili- 
ties of  thebirth  rate  in  the  human  race,  when  not  restrained 
by  intellectual,  social,  or  moral  considerations,  are  thought 
to  be  as  high  as  60  per  thousand,  though  no  statistics 
show  a  birth  rate  as  large  as  this  over  any  considerable 
extent  of  space  or  time. 

The  death  rate  is  computed  and  expressed  in  the  same 
manner  as  the  birth  rate.  For  instance,  if  the  number  of 
deaths  in  the  same  city  during  a  month  was  200,  it  repre- 
sents a  death  rate  of  24. 

The  lowness  of  the  death  rate  is  an  index  of  social 
prosperity.  If  the  death  rate  is  high  it  means  that  there 
is  a  large  amount  of  disease  and  waste  and  a  short  aver- 
age duration  of  human  life.  If,  on  the  other  hand,  the 
death  rate  is  low,  it  means  that  the  average  duration  of 
human   life   is   long,   disease   relatively    infrequent,    and 

*  The  line  of  argument  which  follows  differs  in  some  respects  from  that 
adopted  by  Malthus.  It  represents  the  modem  proof  of  the  theory  rather 
than  the  one  originally  advanced. 


BIRTH  RATE  AND  FOOD   SUPPLY.  43 

working  power  well  utilized.  A  death  rate  of  20  per 
thousand  means  an  average  duration  of  life  of  50  years. 
A  death  rate  of  40  per  thousand  means  an  average  dura- 
tion of  only  25  years,  with  all  the  misery  which  such  a 
state  of  things  connotes. 

§  50.  The  difference  between  the  birth  rate  and  the 
death  rate  in  any  one  year  represents  the  rate  of  increase 
of  population  for  that  year.  If  the  birth  rate  is  45  per 
thousand,  and  the  death  rate  25  per  thousand,  the  in- 
crease of  population  is  20  per  thousand,  or  two  per  cent. 
Such  an  increase  in  any  given  area  means  a  corresponding 
increase  of  the  density  of  population.  As  long  as  this 
increase  is  accompanied  by  corresponding  improvements 
in  the  arts  of  producing  and  utilizing  food,  it  has  no  ad- 
verse effect ;  but  when  the  increase  of  numbers  is  more 
rapid  than  this,  it  involves  difficulty  in  obtaining  enough 
for  people  to  eat.  For  it  is  a  fact  thoroughly  estab- 
lished by  observation,  that  in  any  given  stage  of  the  arts 
there  is  a  certain  point  beyond  which  increased  applica- 
tion of  labor  and  capital  does  not  obtain  correspondingly 
increased  supplies  of  food  from  a  given  area.  A  territory 
which  can  support  one  million  men  in  comfort  cannot 
do  the  same  for  two  million  under  the  same  conditions 
of  cultivation.  Either  the  two  million  must  work  very 
much  harder  to  obtain  their  food  supplies  from  the  land, 
or  they  must  content  themselves  with  less  food/^r  capita. 
This  great  law  of  agricultural  production  is  known  as  the 
law  of  the  diminishing  return.  Up  to  a  certain  point  in- 
creased amounts  of  labor  and  capital  are  accompanied  by 
more  than  proportionate  increase  in  the  product ;  but 
when  this  point  is  passed  the  additional  returns  diminish 
rapidly  and  not  infrequently  cease  altogether.  In  order 
to  live  at  all  the  laborers  have  to  seek  out  new  lands  less 
advantageous  than  the  old,  or  to  content  themselves  with 
obtaining  the  necessary  product  from  the  old  lands  at  an 
economic  disadvantage. 


44  ECONOMIC  RESPONSIBILITY. 

§  51.  Whenever  a  country  has  become  so  crowded  that 
such  a  state  of  things  as  this  is  realized,  the  struggle  for 
domination  between  individuals  gives  place  to  a  struggle 
for  extinction.  Each  man  in  striving  to  obtain  enough  to 
keep  himself  alive  leaves  less  than  enough  for  some  other 
man.  As  society  is  at  present  organized  this  pressure 
will  be  felt  most  severely  by  those  who  have  large  families 
of  children.  The  prudent  man,  who  has  not  married  until 
assured  of  his  ability  to  support  a  family,  has  placed 
himself  outside  of  the  severest  stress  of  this  struggle. 
But  his  less  prudent  competitor,  who  earns  no  more  and 
who  has  more  mouths  to  feed,  may  find  himself,  and 
often  does  find  himself,  through  no  fault  of  his  own  ex- 
cept lack  of  foresight,  in  a  position  where  he  is  unable 
to  keep  his  children  alive.  Not  that  in  civilized  com- 
munities they  often  die  of  actual  and  direct  starvation  ; 
but  that  the  lack  of  the  food  best  adapted  to  their  wants 
makes  them  succumb  to  disease  where  better-fed  children 
would  survive. 

§  52.  Under  favorable  circumstances  this  scarcity  of 
food  may  be  avoided  by  improvements  in  the  arts,  whether 
of  agriculture,  of  domestic  economy,  or  of  good  govern- 
ment. Whatever  contributes  to  the  better  utilization  of 
the  products  of  the  land  for  human  support  increases  the 
number  of  people  that  can  be  maintained  without  the 
danger  of  starvation.  This  result  is  produced  by  any  im- 
provement in  agriculture  which  enables  the  land  to  fur- 
nish larger  crops ;  or  by  better  cooking,  which  enables 
more  nourishment  to  be  obtained  out  of  the  same  crop. 
Improvements  in  clothing  and  shelter,  which  keep  people 
warm,  may  take  the  place  of  food  which  was  once  needed 
to  produce  heat.  Methods  of  government  which  cause  a 
larger  part  of  the  land  to  be  utilized  for  the  support  of  the 
nation  or  diminish  losses  and  waste  from  violence,  may 
serve  to  prevent  the  pressure  of  overcrowding.  But  the 
physiological  possibilities  of  the  birth  rate  are  so  far  in  ex- 


> 


EXCEPTIONAL   CONDITIONS  IN  AMERICA.  45 

cess  of  any  death-rate  which  is  consonant  with  social  pros- 
perity that  the  improvement  in  the  art  of  food  supply, 
direct  or  indirect,  will  not  generally  keep  pace  with  this 
possible  excess.  Even  if  the  pressure  be  momentarily 
relieved,  the  reduction  of  the  death  rate,  which  is  a  con- 
sequence of  such  relief  and  an  index  of  prosperity,  serves 
to  hasten  the  time  when  the  increase  of  population  reaches 
the  limit  set  by  the  possibilities  of  supporting  it. 

§  53.  A  fact  like  this  may  be  obscured  for  a  time  in  a 
country  like  the  United  States,  where  settlers  with  a  high 
degree  of  civilization  occupy  land  which  is  almost  empty. 
Before  such  a  country  has  filled  up  to  the  level  permitted 
by  modern  civilization,  increase  of  numbers  will  for  a  long 
time  mean  increased  economic  advantage,  and  the  law  of 
the  diminishing  return  will  drop  out  of  sight.  But  the 
United  States  is  doing,  in  little  more  than  a  century, 
what  it  has  taken  Europe  several  thousands  of  years  to 
do.  It  is  passing  from  a  density  of  population  limited  by 
the  arts  of  the  hunting  stage  to  one  which  is  allowed  by 
the  modern  arts  of  scientific  agriculture.  Such  a  state 
of  things  is  necessarily  exceptional,  and  must  terminate 
in  a  comparatively  short  time.' 

§  54.  This  pressure  of  population  upon  subsistence 
serves  in  no  slight  degree  as  a  stimulus  to  improvement 
in  the  arts.  It  was  this  which  forced  hunting  tribes  to 
practice  the  domestication  of  animals.  It  was  this  which 
forced  wandering  pastoral  tribes  to  settle  down  and  apply 
themselves  to  the  less  exciting  and  agreeable  arts  of 
agriculture.  It  is  this  which  has  done  much  to  accelerate 
the  change  from  the  military  organization  of  society  to 
the  modern  system  of  free  labor.  The  attempt  to  provide 
for  all  children  that  might  be  born  would,  in  the  opinion 

■  The  criticism  of  Henry  George  ("  Progress  and  Poverty,"  book  ii.), 
which  is  perhaps  to  readers  of  the  present  generation  the  most  familiar 
argument  against  the  Malthusian  theory,  overlooks  this  exceptional  character 
of  American  conditions. 


46  ECONOMIC  RESPONSIBILITY. 

of  the  Malthusian,  not  only  prove  futile  from  the  difficulty 
of  finding  food  enough  to  go  around,  but  it  would  also, 
first,  take  away  the  stimulus  under  which  progress  had 
been  made  ;  second,  put  a  stop  to  the  natural  selection  of 
the  stronger  individuals  and  families  and  reduce  the  race 
to  a  dead  level ;  third,  impair  the  capital  of  the  com- 
munity through  increased  consumption  and  diminished 
production  so  much  that  it  could  not  maintain  the  stage  of 
civilization  which  it  had  reached,  and  that  its  progress  must 
give  place  to  retrogression.  The  Malthusian  therefore 
argues  that  society  cannot  undertake  to  relieve  its  mem- 
bers from  the  pressure  and  from  the  evils  of  poverty  un- 
less they  will  consent  to  adopt  preventive  checks  to 
population.  They  must  be  prepared  so  far  to  reduce 
the  birth  rate  that  the  excess  of  the  actual  birth  rate 
over  the  admissible  death  rate  will  not  outstrip  the  annual 
improvement  in  the  arts  of  producing  food.  If  we  wish 
to  reduce  the  death  rate  to  25  in  the  thousand  and  the  in- 
crease in  food  supply  from  the  area  available  is  not  likely 
to  average  more  than  one  per  cent,  annually,  the  birth 
rate  must  be  kept  down  to  35.  The  man  who  marries 
recklessly,  so  as  to  make  the  consumption  of  his  family 
exceed  its  contribution  to  the  annual  product  of  the  na- 
tion, is,  in  the  opinion  of  the  Malthusian,  assuming  the 
right  to  do  something  which  must  prove  disastrous  to  the 
race  if  adopted  generally.  Against  the  attempt  to  burden 
society  as  a  whole  with  the  results  of  such  imprudence 
the  Malthusian  protests  emphatically.  I  f  the  relief  of  a  cer- 
tain section  of  the  poorer  classes  results,  not  in  the  accumu- 
lation of  property  by  those  classes,  but  in  the  multiplication 
of  the  number  of  their  children,  society,  by  the  re- 
lief which  it  furnishes,  simply  transfers  its  food  supplies 
from  the  support  of  the  children  of  the  efficient  and 
prudent  to  the  support  of  the  children  of  the  shiftless 
and  imprudent.  Such  a  course  must  result  in  degen- 
eration.     It  is  a   condition    of  social    progress  that   so- 


ARGUMENTS  AGAINST  MALTHUS.  47 

ciety  must  keep  its  increase  of  numbers  within  the  limits 
set  by  improvement  in  the  arts.  In  order  to  make  such 
a  general  restriction  of  numbers  possible,  the  respon- 
sibility for  diminishing  the  numbers  of  his  own  family 
must  be  brought  home  to  every  man  ;  and  if  this  respon- 
sibility is  ignored,  the  blame  for  the  condition  of  the  family 
must  be  imputed,  not  to  society  as  a  whole,  but  to  the 
man  who  has  ignored  a  social  necessity. 

§  55.  To  this  view  the  opponents  of  Malthus  reply  : 
I.  There  is  almost  never,  in  civilized  society,  a  present 
or  immediate  pressure  of  population  upon  subsistence. 
There  is  always  food  enough  to  go  around,  if  it  were  only 
better  distributed.  2.  If  such  a  distribution  were  made, 
there  is  no  likelihood  of  a  future  pressure  of  population 
upon  subsistence,  because  increased  comfort  is  accom- 
panied by  a  lower  birth  rate  instead  of  a  higher  one. 

§  56.  These  critics  overlook  the  fact  that  this  surplus  of 
food  in  civilized  countries  is  itself  a  consequence  of  that 
family  responsibility  on  which  the  Malthusian  lays  so 
much  stress.  In  uncivilized  countries  there  is  not  ha- 
bitually any  such  surplus.  It  is  a  matter  of  very  great 
doubt  in  each  year  whether  there  is  going  to  be  food 
enough  to  go  around.  Famine  and  weakness,  resulting 
from  too  great  numbers  and  too  little  food,  constitute  an 
ever-present  danger  to  an  uncivilized  or  half  civilized 
tribe.  The  efforts  to  avoid  this  danger  testify  to  its 
existence  and  its  importance.  Not  a  few  races  have  ha- 
bitually resorted  to  infanticide  as  the  only  means  of  keep- 
ing the  numbers  of  the  tribe  within  the  power  of  the 
land  to  support.  Others,  a  step  farther  advanced,  have 
tried  to  solve  the  question  of  population  by  leaving  the 
matter  to  the  women, — a  system  known  as  the  matri- 
archate.  Each  of  these  methods  lessened  the  burden  of 
unproductive  consumption,  but  neither  of  them  fully  met 
the  necessities  of  the  case.  While  they  checked  consump- 
tion and  made  accumulation  possible,  they  did  not  provide 


48  ECONOMIC  RESPONSIBILITY. 

security  for  such  accumulations  of  capital  nor  means  of 
natural  selection  of  the  strong  ;  still  less  did  they  afford 
the  stimulus  to  production  which  the  combination  of  pri- 
vate property  and  family  life  gives  to  the  modern  laborer 
in  all  but  the  very  lowest  classes. 

§  57.  Nor  have  we  any  reason  to  believe  that  increased 
comfort  is  necessarily  accompanied  by  a  lowering  of  the 
birth  rate.  It  is  true  that  as  society  exists  at  present, 
high  comfort  and  low  birth  rate  are  commonly  associated, 
because  comfort  is  made  to  depend  upon  prudence.  Let 
the  comfort  be  made  independent  of  prudence,  as  in  the 
case  of  the  pauper  or  criminal,  and  the  birth  rate  tends  to 
increase  rather  than  diminish.  It  may  not  be  exactly 
true,  as  some  Malthusians  would  have  us  believe,  that  the 
low  birth  rate  is  the  cause  of  the  comfort,  but  it  is  much 
farther  from  the  truth  to  assert  that  the  comfort  is  the 
cause  of  the  low  birth  rate.  Both  are  the  results  of  a 
common  cause — the  exercise  of  prudence,  which  gives 
high  comfort  and  low  birth  rate  to  those  who  are  capable 
of  practicing  it,  while  those  who  are  incapable  of  so  doing 
have  at  once  a  higher  birth  rate  and  a  lower  level  of 
comfort.* 

§  58.  This  line  of  thought  enables  us  to  explain  satis- 
factorily a  phenomenon  which  has  been  misunderstood 
by  many  of  the  opponents  of  Malthus,  namely,  that  the 
fear  of  starvation  does  not  lower  the  birth  rate  so  much 
as  the  fear  of  losing  social  standing.  In  the  light  of  what 
has  just  been  said,  the  reason  for  this  is  perfectly  clear.  It 
is  not  that  social  ambition  in  itself  constitutes  a  greater 
preventive  check  to  population  than  the  need  of  sub- 
sistence; but  that  the  need  of  subsistence  is  felt  by  all 
men  alike,  emotional  as  well  as  intellectual,  while  social 

'  No  amount  of  facts  such  as  are  accumulated  by  writers  like  Nitti  will 
prove  anything  against  the  Malthusian  theory.  Statistics  show  that  high 
comfort  and  low  birth  rate  go  hand  in  hand.  They  are  absolutely  incapable 
of  showing  which  is  cause  and  which  is  effect. 


ETHICAL   SELECTION.  49 

ambition  stamps  the  man  or  the  race  that  possesses  it  as 
having  reached  the  level  of  intellectual  morality.  Ethical 
selection  can  therefore  operate  on  the  latter  class  as  it 
does  not  on  the  former.  The  intellectual  man  has  possi- 
bilities of  self-restraint  which  the  emotional  man  has  not. 
Give  the  intellectual  man  the  chance  to  reap  the  benefit  of 
such  self-restraint,  and  you  will  find  reduced  birth  rate 
and  increased  comfort  going  hand  in  hand. 

There  are  some  cases  under  the  existing  social  order 
where  men  who  are  capable  of  higher  things  multiply 
recklessly  through  sheer  hopelessness.  With  men  like 
this,  a  better  distribution  of  the  results  of  labor  would 
doubtless  operate  not  only  to  increase  their  productive 
efficiency  but  to  contribute  to  their  prudence  in  marrying, 
and  thus  to  diminish  the  birth  rate.  But  this  result  would 
be  accomplished  by  assimilating  the  condition  of  these 
men  to  the  normal  condition  of  property  owners,  and 
would  be  dependent  on  the  operation  of  those  prudential 
motives  which  the  majority  of  the  opponents  of  Malthus 
habitually  decry. 

§  59.  The  more  completely  you  give  the  prudent  and 
efficient  man  control  of  the  results  of  his  labor,  the  more 
do  you  localize  the  pressure  of  population  upon  subsist- 
ence, and  confine  the  effects  of  this  pressure  to  a  few. 
Under  such  circumstances  there  is  habitually  that  surplus 
of  food  on  which  the  anti-Malthusian  lays  so  much  stress. 
But  give  the  children  of  the  shiftless,  by  thoughtless  char- 
ity or  various  systems  of  poor  relief,  the  right  to  eat  the 
substance  of  the  efficient  and  prudent,  and  you  will  soon 
lose  both  the  capital  and  the  morality  under  which  that 
capital  has  been  created. 

When  the  comfort  of  an  individual  is  made  dependent 
upon  his  foresight  and  prudence,  and  when  the  comfort 
of  a  group  is  made  dependent  on  the  existence  of  intellec- 
tual as  distinct  from  emotional  morality,  we  shall  find 
prudent  men  and  prudent  races  possessing  high  comfort 


50  ECONOMIC  RESPONSIBILITY. 

and  low  birth  rates.  The  history  ot  civihzation  is  in  large 
measure  a  history  of  this  development  of  prudence  and 
comfort.  Possibly  some  nations  are  carrying  this  conscious 
adaptation  of  means  to  ends  a  little  too  far  for  their  own 
good.  The  waste  of  nerve  power  connected  with  the  ex- 
ercise of  conscious  prudence  is  a  real  evil,  and  if  carried  to 
an  extreme  may  offset  the  gain  attendant  upon  the  pos- 
session and  accumulation  of  capital.  The  case  of  France 
is  an  instance  in  point.  The  French  people,  as  a  rule, 
logically  accept  the  consequences  of  the  Malthusian 
theory.  The  birth  rate  is  low,  the  national  wealth  high, 
the  increase  of  population  almost  nil.  Some  writers  think 
that  this  course  of  events  has  been  attended  with  moral 
and  physical  evils ;  that  less  prudence  and  keener  struggle 
for  existence  would  better  serve  to  protect  the  race 
against  danger  of  degeneration.  The  same  criticism  has 
been  applied  to  the  conditions  prevailing  in  many  parts 
of  the  United  States. 

§  60.  This  is  a  fair  point  for  socialistic  criticism.  But 
with  the  average  man,  the  dangers  of  this  extreme  are  less 
than  those  of  the  other.  The  evils  of  thinking  too  much, 
and  trusting  Providence  too  little,  seem  small  in  com- 
parison with  those  which  arise  from  trusting  Providence 
for  everything  and  not  thinking  at  all.  Doubtless  Malthus 
made  a  mistake  in  giving  too  much  countenance  to  the 
idea  that  restrictions  upon  population  must  be  conscious. 
But  his  socialist  critics  make  a  greater  mistake  in  holding 
that  they  are  automatic.  .  The  truth  would  seem  to  be 
that  they  are  for  the  most  part  institutional.  The.  modern 
family  and  the  modern  law  of  capital  have  acted  as  a 
powerful  system  of  preventive  checks  to  population.  The 
apparently  automatic  and  often  non-conscious  operation 
of  these  checks  must  not  blind  us  to  the  historical  power 
which  has  established  and  perpetuated  them.  The  as- 
sumption made  by  so  many  of  the  socialistic  critics  of 
the  Malthusian  theory,  that  the  average  character  of  a 


DELINQUEXT  AND  DEPENDENT  CLASSES.  5  I 

people  will  remain  unchanged  when  the  economic  institu- 
tions under  which  this  character  has  developed  are  radi- 
cally modified  or  abolished,  finds  no  warrant  either  in 
ancient  or  in  modern  history. 

§  61.  It  is  urged  by  some  of  the  socialists  that  the  advo- 
cates of  the  Malthusian  theory  make  too  much  use  of  the 
principle  of  natural  selection,  and  ignore  the  equally  im- 
portant biological  principle  of  functional  adaptation. 
They  urge  that  natural  selection  has  in  large  measure 
done  the  work  which  was  required  of  it  in  inculcating 
prudence,  and  that,  in  order  to  regulate  population  prop- 
erly, we  have  only  to  secure  those  favorable  economic 
conditions  to  which  the  race  has  proved  its  power  to 
adapt  itself.  But  the  history  of  the  English  poor-law 
(§  65)  seems  to  show  that  natural  selection  has  not  done  its 
work  ;  that  such  measure  of  functional  adaptation  as  has 
been  already  secured  is  extremely  precarious,  and  that  it 
can  only  be  maintained  by  continuing  the  stimulus  under 
which  it  has  developed  to  its  present  degree  of  activity. 

§  62.  Although  society  insists  as  far  as  it  can  that  each 
man  shall  be  responsible  for  himself  and  his  family,  it  can- 
not carry  this  principle  out  to  its  logical  conclusion.  We 
cannot  kill  off  the  weak  merely  because  they  have  been 
unable  to  support  themselves.  Still  less  can  we  leave  the 
unfortunate  to  die  as  a  result  of  their  incapacity.  The 
ethical  loss  to  the  community  which  adopted  such  a  course 
would  indefinitely  outweigh  any  material  or  physical  gain. 
The  dependent  and  the  unfortunate  must,  under  certain 
conditions,  be  taken  care  of  by  society,  even  though  the 
process  of  natural  selection  is  thereby  hampered. 

§  63.  Besides  these  two  classes  there  are  two  others 
which  habitually  defy  the  principle  that  every  man  should 
earn  a  living  for  himself  and  his  children.  These  are  the 
criminal  and  the  pauper.  The  case  of  the  criminal,  how- 
ever hard  we  may  find  it  to  deal  with  him  in  practice,  is 
easily    judged  from  the  standpoint  of  economic  theory. 


$2  ECONOMIC  RESPONSIBILITY. 

His  activity  must  be  repressed  and  his  power  of  perpetuat- 
ing his  race  limited.  The  case  of  the  pauper  involves 
more  difficulty.  He  is  not,  like  the  criminal,  actively 
hostile  to  society.  He  claims  charity  on  grounds  which 
are  often  plausible,  and  which  on  investigation  may  pos- 
sibly turn  out  to  be  valid.  We  often  do  not  know  the 
real  reason  why  a  pauper  seeks  charity.  If  it  is  because 
he  can  work  and  will  not,  he  approaches  very  near  to  the 
condition  of  the  criminal ;  he  is  trying  to  get  a  living 
out  of  society  without  rendering  society  an  equivalent. 
If  he  is  willing  and  able  to  work  but  cannot  find  an  op- 
portunity, he  is  no  longer  a  criminal  but  an  unfortunate. 
If  he  is  mentally  or  physically  unable  to  work,  he  is  an 
incapable.  According  as  he  belongs  to  one  or  the  other 
of  these  three  classes  he  demands  different  treatment, 
both  for  his  own  sake  and  for  that  of  society.  Yet  it  is 
frequently  a  matter  of  the  utmost  practical  difficulty  to 
see  where  he  belongs.  Perhaps  he  cannot  tell  himself. 
He  may  belong  to  all  three  by  turns,  according  to  the 
circumstances  in  which  he  is  placed. 

§  64.  In  the  treatment  of  paupers  there  is  a  natural  in- 
clination, both  on  the-  part  of  individuals  and  of  the 
public,  to  take  a  charitable  view  of  the  matter  and  give 
help  in  doubtful  cases.  People  think  that  the  harm  from 
denying  charity  to  a  deserving  man  so  far  outweighs  that 
which  will  result  from  giving  charity  to  an  undeserving 
one  that  they  give  relief  in  a  great  many  cases  simply  be- 
cause they  have  no  power  to  make  investigations.  There 
is  an  evil  involved  in  such  free  exercise  of  private  charity 
which  people  are  slow  to  recognize,  but  which  is  all  the 
more  dangerous  on  that  account.  If  a  man  gives  money 
to  a  pauper  he  seems  to  be  doing  an  unselfish  act.  He 
parts  with  a  certain  amount  of  his  own  property  and  gives 
it  to  some  one  else.  But  the  economic  result  does  not 
stop  here.  The  dollar  which  is  given  to  an  undeserving 
beggar  and  is  spent  by  him  for  his  own  purposes  diverts 


INDISCRIMINATE   CHARITY.  53 

the  product  of  the  labor  of  the  country  from  the  hands  of 
the  industrious  to  those  of  the  idle.  Th.Q property  which 
the  giver  has  placed  at  the  beggar's  disposal  diverts  wealth 
from  some  other  consumer.  It  enables  the  pauper  to  con- 
sume unproductively  what  otherwise  would  probably  have 
gone  to  the  support  of  a  hardworking  man.  If  the  prac- 
tice of  indiscriminate  giving  becomes  general  it  causes  so 
many  beggars  to  lead  lives  of  idleness  that  the  production 
of  the  country  is  greatly  diminished  and  the  industrious 
find  themselves  compelled  to  maintain  an  idle  population 
out  of  a  scant  product. 

§  65.  The  evils  connected  with  private  charity  are 
more  conspicuous  in  the  case  of  misdirected  public  char- 
ity, because  public  charity  is  dispensed  on  a  large  scale 
by  officials  who  have  the  whole  taxable  property  of  the 
community  to  draw  upon.  The  operation  of  the  English 
poor-law  in  the  early  part  of  the  present  century  fur- 
nished a  memorable  instance  of  the  troubles  which  may 
arise  from  this  source. 

The  history  of  poor-relief  in  England  divides  itself  into 
four  periods.  In  the  first  period,  lasting  till  1600,  the 
state  confined  its  efforts  to  the  suppression  of  pauperism, 
leaving  the  care  of  the  incapable  and  unfortunate  to  other 
agencies.  The  Reformation  made  some  of  these  agencies 
inoperative  ;  and  during  the  second  period,  inaugurated 
by  the  Act  of  Elizabeth  (i6oi)the  parish  authorities  were 
charged  with  the  duty  of  relieving  the  destitute.  Every 
effort  was  made  to  prevent  such  relief  from  being  abused. 
The  tendency  of  the  poor  to  migrate  to  parishes  where 
they  received  the  best  treatment  was  met  by  the  acts  of 
settlement,  which  were  framed  to  prevent  people  with 
precarious  means  of  livelihood  from  changing  their  legal 
residence.  The  laxity  of  certain  justices  who  ordered 
relief  to  be  granted  on  inadequate  grounds,  was  met  by 
the  imposition  of  the  workhouse  test  (171 3).  Parishes 
were  encouraged  to  build  workhouses  and  to  make  resi- 


54  ECONOMIC  RESPONSIBILITY. 

dence  in  such  workhouses  a  condition  of  relief.  Pauper- 
ism was  made  as  unpleasant  as  possible  in  order  to  reduce 
the  burdens  of  the  rate-payer.  But  in  the  latter  part  of 
the  eighteenth  century  a  different  spirit  began  to  prevail. 
The  old  practice  was  felt  to  be  unnecessarily  hard  on  the 
poor.  The  use  of  the  workhouse  as  a  test  was  abolished. 
It  was  made  a  place  of  support  for  the  incapable.  No  one 
was  to  be  sent  to  a  workhouse  if  he  could  maintain  him- 
self elsewhere.  By  "  Gilbert's  Act  "  (1782)  the  guardians 
of  the  poor  were  charged  with  the  duty  of  helping  them 
thus  to  maintain  themselves ;  in  other  words,  of  finding 
work  for  every  one  who  applied  for  it.  Until  they  succeeded 
in  finding  work  for  him,  the  applicant  was  to  be  supported 
in  his  own  home  at  public  expense.  The  effect  of  this 
law  on  the  prosperity  of  the  English  agricultural  districts 
was  terrible.  It  relieved  any  man  who  chose  to  avail  him- 
self of  its  provisions  from  the  responsibility  of  seeking 
work.  It  gave  the  overseers  more  to  do  than  they  could 
possibly  accomplish.  They  could  not  find  employment 
for  all  who  applied.  They  were  compelled  to  support 
these  applicants  and  their  families  in  reasonable  comfort. 
The  burden  of  this  support  came  indirectly  on  the  indus- 
trious laborers.  The  condition  of  the  man  who  lived  on 
charity  was  in  many  districts  made  better  than  that  of 
the  man  who  supported  himself  by  honest  labor.  Con- 
spicuously was  this  the  case  with  persons  who  had  large 
families.  The  parish  allowance  for  each  child  was  so 
great  as  to  constitute  a  premium  on  the  increase  of  num- 
bers. In  certain  districts  the  operation  of  the  law  not 
only  crippled  industry,  but  had  most  disastrous  effects  on 
public  morality ;  practically  abolishing  female  chastity 
among  those  classes  to  whom  the  ample  parish  allowance 
for  the  support  of  children  constituted  a  temptation  to 
vice.'  So  great  were  these  evils  that  in  the  year  1834 
Parliament  was  compelled  to  reestablish  the  workhouse 
'  "  Report  of  Poor- Law  Commissioners,  1834." 


THE    WORK   TEST.  55 

test.  By  this  change  the  burden  of  pauperism,  which 
had  increased  with  such  rapidity  that  it  threatened  to 
cripple  English  agricultural  prosperity,  was  gradually 
lightened ;  but  the  southern  and  western  counties  of 
England  have  not  yet  recovered,  either  materially  or 
morally,  from  the  evils  which  were  entailed  upon  them  by 
fifty  years  of  liberal  policy  in  the  matter  of  poor-relief. 

§  6^.  In  the  interest  of  those  who  are  willing  and  able 
to  work  it  is  absolutely  indispensable  to  reduce  the  bur- 
den of  pauperism  to  a  minimum.  Any  other  policy  not 
only  puts  unnecessary  taxes  upon  the  industrious,  but 
tends  to  increase  the  number  of  paupers  and  diminish  the 
number  of  those  who  are  charged  with  the  labor  of  sup- 
porting them. 

The  first  step  toward  reducing  pauperism  is  to  separate 
the  wilful  paupers  from  the  incapable  and  unfortunate  ap- 
plicants for  relief.  By  this  policy  we  are  able  to  refuse  help 
to  the  former  class  and  limit  greatly  the  number  of  those 
who  seek  aid  under  the  pretext  of  belonging  to  one  of  the 
two  latter.  A  part  of  the  work  of  separation  consists  in 
careful  investigation  of  individual  cases.  This  is  our  chief 
means  of  distinguishing  the  incapable  poor  who  cannot 
work,  from  those  who  can.  The  separation  of  the  unfor- 
tunate from  the  pauper  is  more  difficult.  To  secure  this 
end  personal  investigation  on  the  part  of  organized  chari- 
ties or  agents  of  the  government  must  be  supplemented 
by  the  work  test.  If  we  insist  that  an  able-bodied  man 
who  applies  for  help  must  stand  ready  to  do  hard  work  of 
some  sort,  and  if  we  do  not  give  too  much  help  in  com- 
parison with  the  labor  required,  we  avoid  putting  a  pre- 
mium on  pauperism.  We  make  it  probable  that  a  man 
who  applies  for  help  under  such  conditions  really  deserves 
it,  and  is  not  making  the  absence  of  work  a  convenient 
pretext  for  living  in  idleness.  * 

'  It  is  an  open  question  whether  the  administration  of  relief,  and  especially 
of  emergency  relief,  should  be  in  the  hands  of  the  same  authority  that  im- 


56  ECONOMIC  RESPONSIBILITY. 

§  Gj.  The  work  test  just  described  is  primarily  and 
chiefly  used  as  a  means  of  determining  the  character  of 
the  applicants.  If  it  can  be  so  arranged  that  the  product 
of  the  labor  which  is  thus  tested  is  worth  something  to 
the  community,  well  and  good  ;  but  the  attempt  to  make 
the  labor  useful  must  not  be  allowed  to  interfere  with  its 
character  as  a  test.  If  this  once  happens,  the  efforts  to 
render  the  results  of  relief  work  valuable  to  society  are 
worse  than  useless. 

§  68.  These  efforts  take  three  forms:  i.  Public  works 
to  utilize  the  power  of  those  who  are  temporarily  thrown 
out  of  employment.  2.  Labor  colonies  to  give  perman- 
ent occupation  to  those  who  are  in  need  of  it.  3.  Ad- 
vances of  money  procured  by  the  credit  of  the  govern- 
ment, and  placed  at  the  disposal  of  those  who  expect  to 
repay  it  by  their  work.  None  of  these  plans  can  be  said 
to  have  accomplished  the  object  in  view. 

§  69.  There  is  a  specious  argument  in  favor  of  public 
works  for  the  relief  of  those  who  are  temporarily  unem- 
ployed. People  say  that  such  work  would  have  to  be 
done,  sooner  or  later,  in  any  event ;  that  the  unemployed 
must  be  helped  in  some  shape  or  other;  that  even  if 
those  who  are  set  to  work  upon  these  things  do  not  earn 
the  full  amount  of  their  wages,  the  little  they  may  accom- 
plish is  better  than  nothing,  as  otherwise  they  would  have 
to  be  wholly  supported  at  public  expense.  They  also 
add  that  employment  on  useful  work  of  this  kind  pre- 
serves the  self-respect  of  the  laborer  which  the  direct  giv- 
ing of  charity  tends  to  destroy.  But  this  view  of  the 
matter  is  a  somewhat  dangerous  one.  There  is  reason  to 
fear  that  public  works  arranged  with  this  motive  and  ob- 
ject in  view  do  more  harm  than  good.  In  the  first  place, 
most  public  works  cannot  be  constructed  in  the  winter 

poses  the  tests.  If  the  detection  of  fraud  becomes  the  chief  function  of  any 
organization,  such  a  body  is  sometimes  handicapped  in  its  attempts  to  dis- 
cover and  relieve  poverty  that  is  not  fraudulent. 


PUBLIC  RELIEF    WORKS.  5/ 

season,  when  destitution  is  greatest  and  the  need  of  tem- 
porary relief  most  pressing.  In  the  next  place,  the  amount 
accomplished  by  laborers  who  are  set  to  do  such  work 
without  special  training  is  greatly  overestimated  by  those 
who  have  not  had  experience.  It  seems  a  simple  matter 
to  build  a  sewer,  but  it  requires  an  amount  of  training  for 
which  the  man  who  is  given  such  work  as  a  temporary 
means  of  relief  has  had  neither  the  time  nor  the  oppor- 
tunity. In  the  third  place,  the  seeming  advantage  from 
the  construction  of  these  works  causes  too  many  opera- 
tions of  the  kind  to  be  undertaken,  and  diverts  to  these 
operations  a  certain  number  of  laborers  who  would  grad- 
ually have  found  profitable  and  useful  employment  in 
lines  for  which  they  were  more  fitted.  The  net  loss  to 
the  tax-payers  from  this  large  amount  of  ill  directed 
labor  is  greater  than  that  which  would  have  resulted  from 
the  bestowal  of  a  smaller  amount  of  direct  charity  to  the 
persons  who,  by  investigation  and  by  the  work  test,  had 
been  found  worthy  to  receive  it.  Finally,  the  preserva- 
tion of  self-respect  to  the  laborer  by  this  process  is  more 
apparent  than  real.  If  it  is  known  that  public  works  are 
being  constructed  for  which  laborers  are  employed  on 
something  better  than  a  commercial  basis,  the  pressure  for 
these  positions  makes  them  an  object  of  political  wire- 
pulling. It  is  a  false  notion  of  self-respect  which  leads 
the  man  who  can  take  money  out  of  the  public  by  chi- 
canery to  rate  himself  higher  and  be  rated  higher  by  so- 
ciety than  the  one  who  truthfully  confesses  to  himself  and 
others  the  real  ground  on  which  property  is  diverted  to 
his  support. 

Some  of  these  objections  apply  with  less  force  to  works 
of  agriculture  and  land  improvement,  because  the  danger 
of  undue  diversion  of  laborers  into  this  line  of  industry  is 
slight.  We  are  suffering  from  a  drift  of  population  into 
mechanical  industries.  If  we  can  keep  some  of  this  drift 
back,  and  employ  it  in  the  production  of  food,  we  have  a 


$8  ECONOMIC  RESPONSIBILITY. 

twofold  advantage.  First,  the  product  of  agricultural 
labor  will  keep  the  producers  from  starvation,  whether 
they  can  sell  it  or  not.  Second,  the  character  of  the  work 
is  not  such  as  to  render  it  attractive  to  any  but  those  who 
really  deserve  relief. 

§  70.  Labor  colonies  and  similar  means  of  furnishing 
permanent  employment  do  not  as  a  rule  reach  the  class 
for  which  they  are  intended.  They  do  not  teach  men  to 
be  self-supporting.  They  become  "  places  of  refuge  for 
those  who  have  suffered  moral  as  well  as  physical  ship- 
wreck "  ;  not  for  the  industrially  unfortunate,  but  for  the 
chronic  or  vicious  poor. 

Proposals  for  an  advance  of  state  credit  to  laborers  who 
could  not  find  employment  on  advantageous  terms  were 
most  actively  urged  by  Lassalle  some  forty  years  ago.  He 
would  have  allowed  associations  of  laborers  to  pledge  the 
future  product  of  their  labor  as  security  for  such  ad- 
vances, so  that  the  workmen  would  be  relieved  from  their 
present  dependence  on  the  capitalist,  and  be  put  in  a 
position  to  exercise  their  powers  to  the  best  advantage. 
But  no  association  of  workmen  is  in  a  position  to  guaran- 
tee the  utility  of  its  future  product  to  society.  The  very 
industry  of  its  members  might  readily  result  in  over- 
production of  things  that  were  not  wanted  ;  nor  could  the 
agents  of  the  government,  on  the  basis  of  any  statistics 
yet  devised,  be  trusted  to  guard  against  this  danger.  If 
too  many  men  made  watches,  the  selling  price  of  watches 
would  not  cover  the  advances  made  by  the  government ; 
and,  what  is  more  important,  the  utility  of  such  watches 
would  not  make  good  to  society  the  waste  of  food  and 
other  forms  of  public  capital  consumed  by  those  engaged 
in  their  production. 

If  such  advances  are  confined  to  agricultural  laborers, 
the  danger  is,  for  the  reasons  already  given,  much  less. 
Several  schemes  have  been  proposed  for  this  end.  The 
one  most  under  discussion  at  present   is  the  allotment 


AID  IN  FINDING  EMPLOYMENT.  59 

system,  which  plays  a  somewhat  important  part  in  Eng- 
lish social  policy.  Under  this  system  the  public  authori- 
ties buy  land  for  the  use  of  actual  cultivators  in  small 
plots,  borrowing  the  money  for  that  purpose  at  a  low  rate 
of  interest.  It  is  confidently  expected  that  the  occupiers 
can  pay  the  government  a  sufficiently  large  sum  to  make 
the  experiment  financially  self-supporting,  and  that  they 
will  thus  be  relieved  without  great  public  cost  from  most 
of  their  present  dependence  on  the  fluctuations  of  trade. 
This  plan  has  much  to  recommend  it ;  but  it  has  not 
been  tried  long  enough  for  decisive  judgment  as  to  its 
success. 

§  71.  Less  radical  in  their  aims,  but  perhaps  quite  as 
promising  in  their  operation,  are  the  attempts  to  help 
people  to  find  work  for  themselves  instead  of  trying  to 
make  it  for  them.  In  Germany,  bureaus  of  information 
have  accomplished  much  in  this  way ;  and  the  German 
police  system  is  so  eflficient  that  it  has  been  found  pos- 
sible to  provide  food  and  lodging  for  those  who  were 
actually  in  search  of  work  without  great  danger  that  such 
relief  would  be  misused.  But  in  the  absence  of  such 
effective  police  control  this  system  would  certainly  in- 
crease the  number  of  tramps  who  make  the  seeking  of 
work  a  pretext  instead  of  an  object  of  their  journey,  and 
might  readily  result  in  a  condition  like  that  which  pre- 
vailed in  the  worst  days  of  the  English  poor-law. 

Systematic  effort  to  give  the  unemployed  a  chance  to 
find  work  often  sets  in  its  true  light  a  form  of  pauperism 
which  is  widespread,  and  shifts  the  responsibility  for  many 
cases  of  destitution  from  society  as  a  whole  to  the  indi- 
vidual with  whom  it  belongs.  There  is  a  large  number 
of  people  in  times  of  commercial  crisis  who  really  want 
work  but  who  want  it  in  cities,  and  who  are  absolutely 
unwilling  to  engage  in  those  lines  of  food  production 
which  require  them  to  live  in  the  country.  The  number 
of  people  who  ask  relief  and  are  willing  to  take  even  light 


6o  ECONOMIC  RESPONSIBILITY. 

farm-work  as  a  means  of  earning  it  is  exceedingly  small. 
They  insist  on  their  right  to  live,  and  in  many  instances 
are  prepared  to  maintain  that  right  by  a  readiness  to  work 
in  certain  trades  in  the  city,  but  they  absolutely  refuse  to 
engage  in  the  production  of  food,  which  alone  can  keep 
the  community  alive. 

§  72.  Another  means  by  which  it  is  proposed  to  re- 
duce the  burdens  of  pauperism  is  compulsory  insurance. 
This  can  be  utilized  in  some  measure  for  the  incapa- 
ble as  well  as  for  the  unfortunate,  if  they  have  been  com- 
pelled to  contribute  to  the  insurance  funds  before  they 
have  become  incapacitated  for  work. 

The  system  of  compulsory  insurance  has  been  more 
completely  carried  out  in  the  German  Empire  than  any- 
where else.  Small  contributions  are  levied  from  the 
workmen  or  from  their  employers  to  create  a  fund  for  the 
support  of  the  workman  and  his  family  when  he  becomes 
ill  or  superannuated.  There  are  many  reformers  who  are 
anxious  that  other  countries  should  follow  the  example 
of  Germany.  But  the  experiment  has  not  progressed  far 
enough  to  pass  judgment  on  its  success.  In  many  respects 
the  gain  to  the  public  from  a  system  of  this  kind  is  more 
apparent  than  real.  The  payments  to  the  insurance  funds 
must  chiefly,  if  not  wholly,  come  out  of  wages.  Even 
though  they  be  nominally  levied  on  the  employer,  he  is 
compelled  by  competition  with  other  employers  who  are 
not  subject  to  this  levy  to  reduce  in  corresponding  degree 
the  wages  which  he  pays.  If  the  workman  receives  less 
wages,  he  must  either  consume  less  or  save  less.  So  far 
as  he  economizes  on  useless  items  of  consumption  the  in- 
surance fund  thus  created  represents  a  positive  gain  to  the 
community,  providing  for  the  workman's  support  in  the 
future  without  causing  any  corresponding  general  loss  or* 
burden  in  the  present.  But  if  he  economizes  on  articles 
that  are  necessary  or  useful  to  his  well-being  and  that  of 
his  family,  he  lessens  his  own  labor  power  and  that  of  his 


COMPULSORY  INSURANCE.  6l 

children  and  diminishes  rather  than  increases  the  general 
ability  of  the  community  for  maintaining  the  necessary 
burdens  of  poor-relief.  If,  finally,  he  makes  these  pay- 
ments out  of  money  that  he  otherwise  would  have  saved, 
he  transfers  the  provision  for  his  support  from  his  own 
shoulders  to  that  of  the  public  organization.  He  becomes 
less  self-supporting,  and  more  dependent  on  society. 

§  73.  The  opposition  of  friendly  societies  to  schemes 
of  government  insurance  is  something  quite  rational. 
These  societies  are  in  their  nature  agencies  for  the 
promotion  of  voluntary  saving  as  a  means  of  mutual 
insurance.  If  the  government  uses  compulsory  saving 
as  a  means  to  the  same  end,  it  takes  away  the  ground 
for  the  existence  of  these  societies  and  substitutes  a 
system  which  secures  the  same  material  results  to  the 
workman  but  fails  to  secure  the  same  educational  and 
moral  ones.  To  those  who  regard  these  educational  and 
moral  results  as  a  chief  advantage  in  voluntary  saving, 
the  change  to  a  compulsory  system  looks  like  a  step 
backward. 

§  74.  There  is  also  a  positive  danger  that  the  amount 
of  accident  and  sickness  may  increase  under  the  opera- 
tion of  compulsory  insurance.  The  accident  insurance 
law,  in  its  early  application  to  the  German  railroad  ser- 
vice, had  a  distinct  effect  of  this  kind.  The  number  of 
disabling  accidents  was  increased.  The  individual,  being 
freed  from  responsibility  for  his  own  loss  of  time,  put 
himself  in  a  position  where  more  aggregate  time  was  lost. 
Whether  this  was  due  to  increased  carelessness  or  to  slack- 
ness in  returning  to  work  is  a  matter  of  comparatively 
slight  consequence.  In  either  event,  the  diminution  of 
individual  responsibility  and  assumption  of  such  respon- 
sibility by  public  organizations  lessened  the  incentives 
to  continuous  work  and  to  the  care  which  makes  such 
continuous  work  possible.  In  factory  insurance  this  dif- 
ficulty can  perhaps  be  avoided  by  localizing  its  manage- 


62  ECONOMIC  RESPONSIBILITY. 

ment  in  such  a  way  that  the  people  who  have  to  pay  the 
cost  of  unnecessary  accidents  can  see  them  and  guard 
against  their  recurrence.  Accident  insurance  works  much 
better  in  Germany,  where  it  is  locally  administered,  than  in 
Austria,  where  it  is  a  national  matter. 

§  75.  Finally,  there  is  a  danger  that  the  apparent  ad- 
vantages of  an  insurance  system  of  this  kind  may  blind 
public  opinion  to  the  more  real  advantages  of  better 
forms  of  insurance.  A  certain  section  of  the  public  is  so 
dazzled  by  the  prospect  of  pensions  that  it  overlooks  the 
true  ground  on  which  pensions  are  justified.  It  comes  to 
regard  the  pension  as  an  end  in  itself  rather  than  as  a 
means  of  relieving  the  general  funds  of  the  government 
of  a  burden.  Schemes  are  already  proposed  in  England 
for  giving  a  pension  to  every  one  above  a  certain  age, 
independent  of  any  contribution  which  he  may  have  made. 
People  are  impressed  with  the  advantages  of  a  pension 
and  with  the  diflficulties  of  every  special  system  of  contri- 
bution for  securing  it.  They  therefore  propose  to  trans- 
fer the  burden  of  such  payments  to  the  general  tax  account. 
They  do  not  see  that  three  quarters  of  the  arguments  for 
pensions  are  based  upon  their  usefulness  in  lightening  the 
claims  upon  this  general  account,  and  that  a  system  which 
increases  these  claims  undermines  the  very  grounds  on 
which  it  is  advocated.  It  is  sometimes  argued  that  the 
total  amount  of  these  claims  is  not  really  much  increased 
by  the  adoption  of  a  liberal  pension  policy  :  because,  pen- 
sions or  no  pensions,  society  must  in  the  last  resort  sup- 
port the  aged  who  have  worked  out  their  usefulness,  and 
no  harm  can  be  done  by  recognizing  as  a  right  on  the 
part  of  the  individual  what  society  already  recognizes  as 
a  duty.  But  this  is  an  unsound  position.  There  are  cer- 
tain things  which  society  must  do  in  justice  to  itself,  which 
it  cannot  safely  allow  individuals  to  demand  in  justice  to 
themselves.  If  you  give  every  man  a  right  to  a  pen- 
sion when  he  is  incapable  of  self-support,  you  tacitly  ap- 


; 


.     NECESSITY  OF  SELF-RELIANCE.  63 

prove  his  failure  to  provide  for  himself  and  his  children. 
That  the  necessary  degree  of  production  and  of  economy 
by  the  community  as  a  whole  would  be  maintained  if  such 
a  point  of  view  were  adopted,  seems  highly  improbable. 
We  need  measures  which  shall  increase  individual  re- 
sponsibility rather  than  diminish  it ;  measures  which  shall 
give  us  more  self-reliance  and  less  reliance  on  society  as  a 
whole.  We  cannot  afford  to  countenance  a  system  of 
morals  or  law  which  justifies  the  individual  in  looking  to 
the  community  rather  than  to  himself  for  support  in  age 
or  infirmity. 


CHAPTER  III. 

COMPETITION. 

Freedom  of  Exchange — Bargaining — Mercantile  Competition — Market  Price 
— Effects  of  Competition — Normal  Price — Value — Socialistic  Theory  of 
Value. 

J.  E.  Caimes  :  ' '  Some  Leading  Principles  of  Political  Economy,  Newly 
Expounded."     London  (and  New  York),  1874. 

A.  Marshall:  "  Principles  of  Economics."  Vol.  i.  3d  ed.  London  and 
New  York,  1895. 

\V.  S.  Jevons  :  "  Theory  of  Political  Economy."  3d  ed.  London  and 
New  York,  1888. 

F.  V.  Wieser:  "Natural  Value."  (Trans,  by  Malloch.)  London  and 
New  York,  1893. 

§  "j^.  In  mediaeval  times  separate  families  and  com- 
munities supplied  their  own  needs  to  a  degree  which  it 
is  now  hardly  possible  to  realize  ;  although  the  plantation 
life  in  the  Southern  States  a  generation  ago  furnished  in 
some  respects  an  approximation  to  the  feudal  type.  In 
such  a  condition  of  society  the  laborer  has  not,  as  a  rule, 
any  large  surplus  above  the  bare  necessaries  of  life.  The 
excess  of  his  production  over  his  consumption  goes  into 
the  hands  of  the  lord  of  the  manor  or  plantation.  It  is 
the  ruling  class  alone  which  has  goods  to  exchange  for 
outside  products.  Within  the  plantation  or  manor  every- 
thing is  done  by  the  inhabitants  for  one  another,  under  a 
system  of  labor  wholly  or  partly  compulsory,  and  on 
terms  rigidly  fixed  by  custom  or  by  superior  authority. 
Each  individual,  from  master  to  slave,  finds  his  consump- 
tion no  less  than  his  production  closely  restricted.  A 
man's  labor  and  his  enjoyments  both  form  part  of  the 

64 


THE  BEGINNINGS  OF   TRADE.  65 

status  into  which  he  was  born  and  from  which  his  most 
strenuous  exertions  can  hardly  free  him.  He  may  be 
bound  by  caste  regulations  as  in  India,  by  positive  law 
as  was  the  case  in  many  parts  of  Europe,  or  by  the  mere 
force  of  custom,  which  often  needs  no  formulated  law  to 
give  it  effect. 

In  such  stages  of  society  trade  plays  a  relatively  unim- 
portant part.  The  fundamental  characteristic  of  the 
manorial  group  in  England  in  the  thirteenth  century,  says 
Ashley,  was  its  self-sufficiency.  The  village  included  men 
who  carried  on  all  the  occupations  and  crafts  necessary 
for  every-day  life.  There  was  little  room  for  anything 
like  freedom  of  exchange.  The  few  things  that  were 
purchased  were  paid  for  at  prices  fixed  by  custom.  The 
value  of  an  estate  was  measured  by  the  physical  resources 
which  its  owner  possessed.  The  difference  between  the 
measurement  of  public  and  private  wealth,  noted  in  the 
first  chapter,  had  not  yet  come  into  play. 

§  y"].  But  when  the  nation  became  sufficiently  ad- 
vanced to  carry  on  commerce  a  different  state  of  things 
developed.  Its  members  produced  more  than  they  needed 
for  their  own  requirements  and  sold  the  surplus  to  others. 
The  country  obtained  much  of  what  it  used  from  the 
towns.  The  people  in  the  towns  lived  on  food  provided 
by  the  country.  Markets  and  fairs  were  held  at  stated 
times,  to  which  men  of  different  occupations  could  resort 
as  a  means  of  buying  what  they  needed  and  selling  what 
they  produced.  In  such  a  market,  prices  were  never 
wholly  fixed  by  custom,  but,  in  some  measure  at  least,  by 
the  relative  number  of  buyers  and  sellers.  The  rate  of 
exchange  was  not  based  upon  the  number  of  days'  labor 
involved  in  the  product,  but  upon  the  amount  which  the 
consumers  were  ready  to  give  in  exchange  for  it.  The 
more  remote  the  point  of  origin  of  the  goods  purchased, 
the  less  dominant  was  the  influence  of  custom  in  fixing 
the  price  which  should  be  charged. 


66  COMPETITION. 

%  78.  As  labor  became  freer  and  more  diversified,  peo- 
ple produced  more  and  more  for  one  another  and  less 
exclusively  for  themselves.  The  advantages  of  division 
of  labor  made  themselves  felt.  If  a  man  attempted  to 
supply  himself  and  his  family  with  everything,  he 
was  obliged  to  spend  a  great  deal  of  time  for  a  compara- 
tively small  product.  The  many  occupations,  which  he 
was  forced  to  pursue  by  turns,  prevented  the  attainment 
of  a  high  degree  of  dexterity  in  any  one  of  them.  The 
waste  of  time  in  passing  from  one  to  another  meant  a 
corresponding  loss  of  efficiency.  When  regular  means  of 
sale  were  assured,  each  man  found  it  more  profitable  to 
devote  himself  to  some  one  thing  in  which  he  had  special 
advantages,  and  to  exchange  the  surplus  product  which 
he  could  not  use  for  the  goods  which  others  were  ready  to 
offer.  In  this  way  it  was  possible  for  the  community  to 
combine  the  advantages  of  specialized  production  and  of 
diversified  consumption.  Each  man  could  contribute  the 
largest  share  to  the  public  wealth  by  confining  his  produc- 
tion to  one  line.  He  could  obtain  the  largest  use  and  en- 
joyment from  the  public  wealth  by  spreading  his  consump- 
tion over  a  great  variety  of  lines.  As  hand  labor  was 
gradually  supplemented  and  rendered  more  efficient  by 
machinery  the  specialization  of  work  became  more  and 
more  marked.  In  the  industrial  civilization  of  the  present 
day  there  are  few  who  produce  all  that  they  need  for  their 
own  requirements.  The  most  prosperous  man  is  usually 
one  who  consumes  only  a  small  portion  of  his  own  pro- 
duct and  has  a  large  surplus  to  sell  to  others. 

§  79.  Freedom  of  production  and  of  trade  are  accom- 
panied by  increased  freedom  in  consumption.  With  the 
adoption  of  a  system  which  gives  a  great  many  individuals 
property  to  exchange,  there  has  been  a  gradual  abandon- 
ment of  legal  enactments  which  were  intended  to  re- 
strict exchange  and  limit  expenditure.  Sumptuary  laws, 
which   prescribe   the   dress  and  food    which   individuals 


SUMPTUARY  LAWS.  6/ 

may  use,  have  for  the  most  part  become  a  thing  of  the 
past.  We  hav^e  ceased  to  pass  statutes  to  prevent  men 
from  ruining  themselves  in  their  own  way,  if  they  see  fit 
to  do  so.  Only  in  those  cases  where  the  individual,  by 
exercising  rights  of  trade,  will  injure  others  as  well  as 
himself,  do  we  continue  to  prohibit  sales  and  purchases. 

The  clearest  case  for  prohibiting  such  transactions  is 
connected  with  the  abolition  of  slavery.  Formerly  a  man 
could  buy  and  sell  slaves,  and  in  a  great  many  communi- 
ties he  could  sell  himself  or  his  children  into  slavery. 
To-day  it  is  recognized  that  such  a  transaction  is  a  public 
wrong,  not  a  private  one.  The  man  who  sells  himself  or 
his  children  into  slavery  harms  not  only  the  parties  im- 
mediately interested,  but  the  industrial  future  of  the 
nation  as  a  whole.  Such  dealings  are  therefore  abso- 
lutely forbidden.  But  the  corresponding  evil  and  wrong 
of  prostitution  is  allowed  to  go  on  unheeded.  It  is  only 
where  public  sentiment  is  practically  unanimous  as  to  the 
existence  of  a  public  necessity  that  prohibitory  laws  can 
be  enforced.  The  case  of  the  liquor  traffic  furnishes  a 
marked  illustration  of  this  truth.  No  one  denies  that  a 
great  deal  of  harm  is  done  by  the  sale  of  intoxicating 
drinks  ;  but  in  the  majority  of  communities  society  finds 
it  extremely  difficult  to  enforce  any  effective  restrictions 
upon  such  traffic.  The  doctrine  of  individual  freedom 
has  made  such  progress  that  most  communities  tolerate 
the  exercise  of  such  freedom  in  many  transactions  which 
their  moral  sense  distinctly  condemns. 

§  80.  When  we  try  to  make  positive  laws  as  to  what 
people  shall  buy  and  sell,  instead  of  negative  ones  as 
to  what  they  shall  not  buy  or  sell,  we  are  confronted 
with  even  greater  obstacles.  The  enforcement  of  sanitary 
regulations,  however  necessary  for  the  public  health,  is 
attended  with  extreme  difficulty.  There  is  a  universal 
consensus  of  opinion  that  tenement  houses  should  con- 
form to  certain  requirements  with  regard  to  light,  air,  and 


68  COMPETITION. 

drainage,  but  the  difficulty  of  giving  effect  to  these  re- 
quirements is  enormous.  If  the  demand  for  bad  tene- 
ment houses  is  such  that  people  find  it  profitable  to  build 
them  and  to  let  them,  it  is  nearly  impossible  to  stop  such 
traffic.  The  erection  of  model  dwellings  enables  that 
class  of  the  community  which  appreciates  the  advantage 
of  such  improvements  to  enjoy  them.  But  it  does  not 
prevent  the  rest  of  the  people  from  living  as  they  did 
before,  nor  does  it  stop  the  tenement-house  owner  from 
making  his  profit  out  of  public  squalor.  Even  if  some  of 
the  worst  tenements  are  condemned  by  the  exercise  of 
municipal  authority  and  better  ones  are  built  in  their 
places,  the  result  is  too  often  merely  an  overcrowding  at 
some  other  point.  Public  knowledge  of  the  laws  of  health 
and  public  responsibility  as  to  the  evils  of  overcrowding 
are  needed  in  order  to  give  effect  to  any  statute  or  ordi- 
nance. 

A  striking  instance  of  the  difficulties  connected  with  the 
effort  to  avoid  overcrowding  was  furnished  by  the  experi- 
ence of  Miihlhausen.  This  city,  which  formed  the  centre 
of  the  cotton  industry  of  upper  Alsace,  was  long  noted 
for  the  model  dwellings  in  which  its  operatives  lived. 
But  the  direct  personal  and  unofficial  investigations  of 
Herkner  disclosed  the  fact  that  these  supposed  advan- 
tages were  in  large  measure  illusory,  and  that  any  slight 
gain  at  some  points  was  offset  by  increased  pressure  and 
more  shameless  overcrowding  at  others. 

§  8 1.  A  certain  amount  of  positive  legislation  is  al- 
ways necessary  for  public  health  and  public  enlighten- 
ment. We  cannot  allow  the  ignorant  man  to  exercise 
his  freedom  in  cultivating  bacteria  or  in  leaving  his  chil- 
dren without  education.  The  one  is  dangerous  to  the 
health  of  the  whole  community,  the  other  to  its  future 
intelligence  and  morals.  In  neither  case  will  a  let-alone 
policy  cure  itself  by  the  elimination  of  the  unfit.  Wise 
and  unwise  together  are  bound  to  suffer  in  very  consider- 


EFFECT  OF  CUSTOM  ON  EXPENDITURES.  69 

able  measure  from  the  pestilence  engendered  by  public 
filth  or  the  corruption  attendant  on  public  ignorance.  In 
cases  where  such  positive  legislation  is  found  necessary, 
it  is  generally  best  for  the  government  to  take  the  trans- 
action wholly  out  of  the  realm  of  sale  and  purchase,  and 
to  provide  means  by  which  sanitation  and  education  can 
be  had  at  the  expense  of  the  tax-payers.  Compulsory 
education  involves  public  schools  ;  compulsory  drainage 
involves  public  sewers  ;  compulsory  vaccination  involves 
public  medical  service.  Only  in  those  cases  where  viola- 
tions of  the  statute  are  done  in  public  sight,  under  the 
authority  of  parties  who  can  be  held  responsible — as  in 
the  case  of  unhealthful  and  dangerous  appliances  in  fac- 
tories— do  we  find  important  exceptions  to  this  rule. 

§  82.  Although  laws  prescribing  what  a  man  may  buy 
or  sell  have  fallen  into  disuse,  it  must  not  be  supposed 
that  every  man  exercises  his  intelligence  and  pleasure  to 
buy  what  will  give  him  the  most  happiness.  People  are 
bound  by  custom  where  they  have  ceased  to  submit  to 
law.  A  large  part  of  the  expense  of  most  people  is  regu- 
lated, not  by  their  own  desires  and  demands,  but  by  the 
demands  of  the  public  sentiment  of  the  community  about 
them.  The  standard  of  life  of  every  family  is  fixed  in 
large  measure  by  social  conventions.  Few  are  intelligent 
enough  to  break  away  from  those  conventions,  even  where 
they  are  manifestly  foolish.  Although  we  have  made 
much  progress  in  the  direction  of  economic  freedom,  it  is 
a  mistake  to  assume  that  the  authority  of  custom  in  these 
matters  is  a  thing  of  the  past.  With  most  men,  custom 
regulates  their  economic  action  more  potently  than  any 
calculation  of  utility  which  they  are  able  to  make.  Nor 
can  we  assume,  as  some  writers  are  prone  to  do,  that 
such  custom  represents  the  average  judgment  of  the  com- 
munity as  to  the  things  needed  for  the  comfort  and  happi- 
ness of  its  members.  It  represents  an  average  absence  of 
judgment — a  survival  of  habits  which  doubtless  proved 


70  COMPETITION. 

useful  in  times  past,  but  which  in  many  instances  have 
entirely  outlived  their  usefulness. 

The  success  of  advertising  shows  how  little  intelligence 
is  habitually  exercised  in  these  matters.  A  man  does  not 
generally  use  his  nominal  freedom  to  buy  what  he  wants 
until  some  one  comes  and  tells  him  in  stentorian  tones 
what  he  wants  to  buy.  The  authority  of  custom  and 
tradition  can  only  be  overcome  by  the  authority  of  drums 
and  trumpets.  It  is  a  mistake  to  draw  too  fine-spun  de- 
duction as  to  the  motives  which  guide  buyers  in  their 
choice,  when  three  quarters  of  the  buyers  exercise  no 
choice  at  all.  It  is  not  merely  that  people  want  things 
which  hurt  them,  or  which  fail  to  do  them  the  maximum 
good — a  point  well  developed  in  the  writings  of  Patten — 
but  that  they  buy  things  without  knowing  whether  they 
want  them  or  not,  through  sheer  vis  inertice. 

§  83.  Where  consumption  has  become  diversified  and 
the  division  of  labor  has  established  itself,  the  determina- 
tion of  the  rate  of  exchange  of  goods  between  difTerent 
producers  becomes  a  matter  of  cardinal  importance.  In 
undeveloped  societies  a  man's  wealth  is  measured  in  the 
physical  things  which  he  has  at  command.  He  is  rich 
or  poor  according  to  the  extent  of  his  lands,  the  number 
of  his  dependents,  the  herds  and  the  crops  which  he  can 
raise  for  their  support.  But  when  property  has  taken  the 
place  of  slavery  as  an  economic  force,  and  when  people 
have  begun  to  exchange  their  property  more  or  less  freely 
with  one  another,  a  man's  personal  wealth  is  estimated 
in  money.  The  goods  which  he  makes  are  valued,  not 
as  a  source  of  enjoyment  to  the  producer  himself,  but 
as  a  means  of  commanding  the  goods  and  services  of 
others  in  the  open  market.  The  measure  of  his  wealth  is 
found  in  the  exchangeability  of  his  product  and  its  power 
to  command  a  price. 

A  price,  in  the  broadest  sense  of  the  word,  is  the 
quantity  of  one  thing  which  is  exchanged  for  another. 


BARTER.  71 

§  84.  Where  two  persons  exchange  their  goods  or 
services,  without  the  intervention  of  money,  the  transac- 
tion is  known  as  barter.  I  may  barter  a  ton  of  coal  for  a 
pair  of  shoes,  or  an  hour's  labor  for  a  breakfast.  Under  a 
system  of  barter,  either  man's  contribution  may  be 
regarded  as  the  price  of  the  other.  We  may  consider  the 
breakfast  as  the  price  of  the  labor,  or  the  labor  as  the 
price  of  the  breakfast. 

Barter  flourishes  chiefly  among  uncivilized  communities, 
or  those  reduced  to  severe  straits  by  the  operation  of  a 
destructive  war  ;  though  survivals  of  this  method,  as  well 
as  of  many  other  uncivilized  ones,  may  be  seen  in  the 
deaHngs  of  children  with  one  another.  Barter  is  not 
available  in  any  complicated  system  of  trade.  If  A  makes 
shoes  and  wants  cloth,  while  B  makes  cloth  and  wants 
shoes,  the  two  can  resort  to  barter  ;  but  if  B,  who  makes 
cloth,  wants  flour,  while  C  makes  flour  and  wants  shoes, 
the  attempt  to  provide  for  the  needs  of  all  three  men  by 
a  system  of  barter  becomes  very  perplexing.  The  diffi- 
culty is  met  by  a  resort  to  tnoney ;  that  is,  to  some 
medium  of  exchange  which  A,  B,  and  Care  all  ready  to 
accept.  If  A  sells  a  pair  of  shoes  to  C  for  five  dollars,  he 
does  not  need  to  inquire  whether  C  makes  cloth  ;  he  can 
take  the  five  dollars  and  buy  cloth  of  ^.  B  can  then  take 
the  five  dollars  and  buy  flour  of  C.  Through  the  inter- 
vention of  money  each  producer  has  sold  his  product  to 
the  man  who  wanted  it,  and  obtained  what  he  wanted 
from  the  man  who  produced  it,  in  a  way  which  would 
have  been  almost  impossible  under  a  system  of  barter. 

§  85.  Just  what  constitutes  money  is  a  question  which 
can  best  be  answered  at  a  later  stage  of  our  inquiry.  For 
the  present  it  is  enough  to  say  that  it  must  be  universally 
acceptable  throughout  the  community,  so  that  it  can  be 
used  for  the  purchase  of  goods  or  services  of  every  kind  ; 
and  that  it  must  be  sufficiently  homogeneous  in  character 
for  people  to  desire  a  given  quantity  of  it,  rather  than  a 


72  COMPETITION. 

particular /«V^^  of  it.'  Anything  which  possesses  these  two 
characteristics  may  serve  as  money.  The  actual  money 
of  any  civilized  nation  usually  consists  of  gold,  silver,  and 
paper,  accredited  with  the  stamp  of  the  government.  The 
international  money  of  the  world,  acceptable  by  weight 
without  the  stamp  of  any  government,  is  gold. 

Under  the  modern  commercial  system,  prices  are  meas- 
ured in  money.  A  price,  in  the  commercial  sense  of  the 
word,  may  be  defined  as  the  quantity  of  money  for  which 
the  right  to  an  article  or  service  is  exchanged.  The  man 
who  furnishes  the  article  or  service  is  known  as  the  seller ; 
the  man  who  furnishes  the  money  is  known  as  the  buyer. 

§  86.  If  the  transaction  is  an  isolated  one,  and  not  one 
of  a  series  of  similar  transactions,  the  price  is  usually 
fixed  by  bargaining.  Suppose  A  wishes  to  sell  a  house 
unlike  other  houses  in  situation  or  construction,  and  B  is 
the  only  man  who,  for  the  moment  at  any  rate,  wishes  to 
buy  it.  It  may  happen  that  the  maximum  price  which  B 
is  willing  to  pay  is  less  than  the  minimum  which  A  is  wil- 
ling to  accept.  In  that  case  there  will  be  no  sale.  Or  it 
may  happen  that  ^'s  maximum  exactly  coincides  with  A's 
minimum.  In  that  case  there  will  be  a  sale  at  exactly  this 
price.  But  it  may  also  happen  that  B\  maximum  is  some- 
what higher  than  ^'s  minimum  ;  and  in  view  of  this  pos- 
sibility, A  is  unwilling  to  name  the  lowest  price  at  which 
he  will  sell  until  he  sees  whether  B  may  not  be  induced  to 
pay  more,  while  B  is  equally  unwilling  to  name  his  highest 
price  until  he  sees  whether  A  may  be  induced  to  sell  for 
less.  So  it  will  probably  happen  that  A  names  a  price 
somewhat  higher  than  the  minimum  which  he  would  ac- 
cept, and  that  B  replies  by  offering  a  price  somewhat  less 

'  Whenever  certain  pieces  of  money,  be  they  few  or  many,  are  decidedly 
preferred  to  the  general  stock,  they  are  rapidly  withdrawn  from  circulation. 
They  may  find  their  way  into  the  collections  of  numismatists,  into  the  strong 
boxes  of  bankers,  or  even  into  the  mints  of  foreign  countries,  according  as 
one  cause  or  another  has  produced  the  preference  in  question. 


BARGAIATING.  73 

than  the  maximum  which  he  is  prepared  to  give.  Thus 
A  might  ask  a  nominal  price  of  $15,000  when  he  would 
be  ready  to  take  $12,000  rather  than  lose  the  chance  of 
selling  the  house  ;  while  B  might  make  a  first  offer  of 
$11,000,  though  he  would  be  prepared  to  pay  $13,000 
rather  than  lose  the  chance  of  buying  it.  Successive  offers 
bring  A  and  B  nearer  together,  and  finally  the  house  is 
sold  at  some  price  not  less  than  $12,000  nor  more  than 
$13,000  ;  the  exact  figure  depending  on  the  relative  skill 
in  bargaining  shown  by  A  and  B. 

§  87.  But  if  there  are  other  house  owners  in  the  same 
situation  as  ^4,  or  other  buyers  in  the  same  situation  2isB, 
the  matter  assumes  a  different  aspect.  A  is  afraid  to  ask 
an  exorbitant  price  for  fear  B  may  go  and  buy  of  some 
one  else  ;  B  is  unwilling  to  begin  with  an  unduly  low 
figure,  for  fear  that  A  may  break  off  negotiations  with 
him  and  deal  with  some  other  buyer.  The  moment 
there  are  other  sellers  who  can  enter  into  competition 
with  A,  or  other  buyers  who  can  enter  into  competition 
with  B,  the  chance  for  bargaining  is  greatly  restricted,  if 
not  altogether  abolished. 

Competition  may  be  defined  as  the  effort  of  rival  sellers 
to  dispose  of  their  goods  and  services,  or  of  rival  buyers 
to  secure  the  goods  and  services  which  they  require  ;  an 
effort  limited  by  the  desire  of  the  seller  to  secure  as  high 
a  price  as  possible,  and  by  the  desire  of  the  buyer  to  pay 
as  low  a  price  as  possible.'  Its  existence  shows  that  peo- 
ple are  guided  in  their  dealings  by  individual  self-interest. 
Its  action  may  be  totally  suspended  by  combination, 
where  sellers  or  buyers  act  in  concert  and  not  in  rivalry. 
An  effective  combination  of  sellers  is  known  as  a  mo- 
nopoly. It  may  also  be  greatly  modified  by  custom  or 
by  sentiment.  Custom,  with  or  without  the  authority  of 
law,  often  causes  the  seller  to  accept  a  price  lower  than 

'  It  may  be  briefly  but  pertinently  defined  in  the  vernacular  as  the  effort 
not  to  get  left. 


74  COMPETITION. 

that  which  he  could  otherwise  obtain.  Sentiment,  on  the 
part  of  an  individual  or  of  the  public  as  a  whole,  occa- 
sionally leads  the  buyer  to  pay  a  larger  price  for  goods  or 
services  than  that  which  would  be  absolutely  necessary  for 
securing  them. 

§  88.  A  place  where  prices  are  determined  by  competi- 
tion is  known  as  a  market.  It  makes  no  difference  whether 
the  goods  are  actually  exposed  for  sale,  as  in  the  mediae- 
val markets,  or  largely  bought  and  sold  on  the  basis  of 
warrants  or  telegraphic  orders,  as  in  the  produce  ex- 
changes of  to-day.  The  essential  thing  is  that  different 
buyers  and  sellers  shall  know  something  about  one  an- 
other's transactions,  so  that  the  individual  buyer  need  not 
pay  more  than  the  prevailing  rate,  nor  the  individual  seller 
be  forced  to  sell  for  less  than  the  prevailing  rate. 

There  may  be  different  markets  for  the  same  article  in 
the  same  place.  The  prices  in  the  wholesale  market  are 
determined  by  one  set  of  conditions,  and  those  in  the 
retail  market  by  another.  Though  not  wholly  indepen- 
dent, they  can  often  move  separately. 

It  is  doubtful  whether  we  should  apply  the  term  market 
to  places  or  groups  of  transactions  where  there  is  compe- 
tition on  one  side  only,  and  monopoly  or  combination 
on  the  other ;  where  the  buyers  compete  and  the  sellers 
do  not. 

§  89.  In  any  given  market,  the  supply  of  an  article,  in 
its  technical  sense,  is  the  amount  offered  at  a  given  price. 
It  tends  to  increase  as  the  price  increases.  It  must  be 
distinguished  from  the  stock,  which  is  an  absolute  amount 
independent  of  price. 

In  any  given  market  the  demand  for  an  article  is  the 
amount  which  will  be  taken  at  any  given  price.'     It  tends 

'  There  is  another  sense  of  the  word  demand,  occasionally  used  by  nearly 
all  the  older  economists,  and  emphasized  by  Cairnes.  In  Cairnes'  use  of  the 
word,  it  means,  not  the  quantity  of  a  particular  article  demanded,  but  the 
quantity  of  money,  or  other  things  representing  general  purchasing  power, 


MARKET  PRICE,  75 

to  diminish  as  the  price  increases.  It  must  be  distin- 
guished from  desire,  which  is  a  feeling,  while  demand  is  a 
concrete  quantity.  Desire  is  the  cause  of  demand,  but 
the  two  terms  are  different  in  kind  and  can  never  be  used 
interchangeably. 

§.90.  The  market  price  of  an  article,  under  the  modem 
commercial  system,  is  the  price  at  which  the  demand  is 
equal  to  the  supply.  For,  if  the  supply  at  any  given 
price  is  greater  than  the  demand,  the  several  sellers  will 
be  driven  to  make  special  efforts  and  concessions  in  order 
to  dispose  of  their  goods  ;  while  conversely,  if  the  demand 
at  any  given  price  is  greater  than  the  supply,  the  buyers 
will  be  led  to  offer  special  inducements  in  order  to  get 
the  goods  which  they  want.  Suppose  that  cotton  of  a 
certain  grade  is  selling  in  the  New  York  market  at  eight 
cents  a  pound.  If  the  amount  of  cotton  brought  to  New 
York  from  week  to  week  to  be  sold  is  exactly  equal  to  the 
amount  taken  out  of  the  New  York  market  by  the  con- 
sumers, the  price  is  likely  to  remain  at  eight  cents.  But 
if  the  amount  brought  is  in  excess  of  the  amount  taken 
away,  the  sellers  will  see  that  the  stocks  are  increasing, 
and  each  will  be  afraid  of  being  left  with  unsold  cotton 
on  his  hands  which  he  may  be  unable  to  dispose  of, 
except  at  a  great  sacrifice.  Competition  among  sellers 
now  becomes  active.  Each  seller  strives  to  get  rid  of  his 
cotton, — at  eight  cents  if  possible,  but  if  that  price  cannot 
be  had,  at  seven  and  a  half  cents,  or  perhaps  even  at  seven 
cents,  rather  than  be  left  with  unsold  and  unsalable  cotton. 
As  this  process  goes  on,  the  lower  prices  induce  the 
buyers   to   take   more  cotton,  and    discourage   the   pro- 

which  buyers  stand  ready  to  give  in  exchange  for  it.  The  word  is  used  by 
the  commercial  world  in  both  senses  with  about  equal  frequency.  It  makes 
comparatively  little  difference  which  meaning  we  adopt,  as  long  as  we 
adhere  to  the  one  selected.  While  Cairnes'  definition  is  for  some  purposes 
better  than  that  given  in  the  text,  there  are  many  other  purposes  for  which 
it  is  not  so  good.  There  appears  to  be  no  sufficient  reason  for  departing 
from  the  prevalent  usage  of  modern  economists. 


^6  COMPE  TI TION. 

ducers  from  sending  so  much  to  New  York ;  in  other 
words,  they  increase  the  demand  and  diminish  the  supply, 
until  a  new  point  of  equilibrium  is  established.  How  far 
the  actual  price  goes  down  depends  for  the  moment 
chiefly  upon  the  amount  of  additional  use  of  cotton  which 
is  caused  by  a  fall  in  price.  If  a  difference  of  half  a  cent 
a  pound  greatly  stimulates  the  manufacture  of  cotton, 
the  price  in  the  case  supposed  is  not  likely  to  fall  below 
seven  and  a  half  cents.  If,  on  the  other  hand,  the  differ- 
ence of  half  a  cent  has  no  great  effect  on  consumption, 
the  price  for  the  time -being  is  likely  to  fall  to  seven  cents 
or  even  lower. 

Now  take  the  opposite  case.  Suppose  that  at  eight 
cents  the  demand  is  greater  than  the  supply.  We  shall 
have  competition  of  buyers  instead  of  sellers.  There  is 
not  going  to  be  enough  cotton  for  everybody  at  eight 
cents.  A  cotton  merchant  or  broker  sees  that  the  stock 
of  cotton  is  being  gradually  reduced.  If  this  process 
goes  on,  it  means  that  there  will  be  a  scarcity  in  the  im- 
mediate future.  He  therefore  refuses  to  part  with  his 
cotton  at  eight  cents,  hoping  to  be  able  to  command 
higher  prices  a  week  hence.  Others  follow  his  example. 
The  buyers  can  no  longer  get  the  amount  of  cotton  they 
need  for  eight  cents  a  pound.  Some  are  unwilling  to  give 
more  than  eight  cents  and  drop  out  of  the  market ; 
others  are  prepared  to  pay  eight  and  a  half  cents;  still 
others  will  go  as  high  as  nine  cents  rather  than  do  with- 
out the  cotton.  Whether  the  actual  price  goes  up  to 
eight  and  a  half  cents,  or  to  nine  cents,  or  even  higher^ 
depends  largely  on  the  number  of  buyers  who  withdraw 
from  the  market  at  successive  changes  in  the  price.  If  a 
large  proportion  of  the  buyers  will  not  pay  more  than 
eight  cents,  the  merchants  can  increase  the  price  but 
little.  The  man  who  holds  his  cotton  at  a  price  which 
drives  the  buyers  out  of  market  cuts  off  his  own  head. 
But  if  a  large  proportion  of  the  buyers  are  prepared  to 


THE  DEMAND   CURVE, 


77 


pay  nine  cents,  the  merchant  will  probably  do  well  to 
refuse  to  sell  for  less  than  this  figure.  If  he  is  wise,  he 
will  continue  to  hold  back  his  cotton  as  long  as  the  stock 
in  the  market  continues  to  diminish ;  that  is,  as  long  as 
the  amount  taken  by  consumers  at  existing  prices  exceeds 
the  amount  sent  to  market  by  producers.  When  this 
state  of  things  is  on  the  point  of  being  reversed,  he  will 
sell.  No  further  rise  in  prices  is  probable.  He  is  much 
more  likely  to  see  a  fall,  and  cannot  afford  in  such  an 
event  to  be  left  with  unsold  goods  on  his  hands.  The 
self-interest  of  each  merchant  leads  him  to  refuse  to  sell 
as  long  as  the  demand  exceeds  the  supply,  and  to  sell 
when  the  two  things  become  equal  to  one  another. 


soooo 

*0000 
30000 

tsooo 


p 


Q                         V 

\ 

fr'' 

\, 

^, 

p 

A-&  ft 


§  91.  Beginning  at  the  point  O  (Figure  i),  lay  off  in 
the  horizontal  line  OP  a  series  of  points  whose  distances 
from  O  shall  represent  successive  prices  of  cotton  per 
pound.  From  these  successive  points,  representing 
price,  let  vertical  lines  be  raised  representing  quan- 
tities of  cotton  which  will  be  taken  by  the  purchasers  at 
those  prices  in  the  course  of  a  week.  These  quantities 
tend  to  fall  as  the  price  rises.  If  the  purchases  at  eight 
cents  are  40,000  bales  per  week,  we  may  assume  for  the 
sake  of  illustration  that  only  30,000  bales  would  be  taken 
at  nine  cents,  and  only  25,000  at  ten  cents ;  but  that  a  fall 
in  price  to  seven  cents  would  call  out  a  demand  for  50,000 
bales  a  week,  and  a  fall  to  six  cents  a  demand  for  65,000 


78  COMPE  TI TION. 

bales.  A  fractional  price,  like  seven  and  a  half  cents, 
would  call  forth  a  demand  intermediate  between  that  at 
eight  cents  and  that  at  seven.  If  we  establish  a  number 
of  points  in  this  way  and  connect  them  by  a  line,  we  shall 
have  what  is  known  as  a  demand  curve,  representing  the 
whole  series  of  relations  between  price  and  quantity 
demanded. 

If,  in  Figure  2  DU  is  the  demand  curve  for  a  given 
article  in  any  given  market,  then  at  any  assumed  price 
Opjy  the  demand  will  be  represented  by  the  line  p^d^; 
similarly  at  the  prices  0p2,  Op^,  the  demand  will  be 
represented  respectively  by  the  Wn^s  p/i 2,  p/l^ 

§  92.  The  shape  of  the  demand  curve  is  different  for 
different  commodities,'  and  even  for  the  same  commodity 
in  different  markets.  But  its  form  is  limited  by  one  gen- 
eral law ;  the  quantity  demanded  tends  to  increase  as  the 
price  diminishes,  and  to  diminish  as  the  price  increases. 
This  is  readily  established  by  observation  of  commercial 
facts.  It  can  also  be  proved  theoretically,  as  a  deduction 
from  observed  principles  of  human  nature. 

It  is  a  well  known  law  of  psychology  that  the  same 
stimulus,  if  repeated  more  and  more  rapidly,  produces  a 
constantly  diminishing  sense  of  added  pleasure  or  pain. 
As  an  economic  consequence  of  this,  rapidly  increasing 
supplies  of  the  same  class  of  goods  do  not  proportionately 
increase  the  happiness  of  their  possessor,  but  are  all  the 
time  diminishing  in  their  utility  '  to  him.     The  first  slice  of 

'  In  these  figures  the  horizontal  lines  represent  prices,  and  the  vertical 
lines  quantities  of  the  commodity.  Horizontal  lines  must  therefore  be  com- 
pared with  one  another,  and  vertical  lines  with  one  another  ;  we  must  not 
attempt  to  take  the  ratio  between  a  horizontal  and  a  vertical  line,  since  the 
two  represent  quantities  of  different  kind,  with  different  units  of  measurement. 

'  This  point  is  further  developed  in  chapter  x. 

'  Utility,  as  the  word  has  been  used  by  writers  on  economics,  means  the 
power  of  satisfying  a  temporary  desire  rather  than  the  power  of  doing  a  per- 
manent good.  In  this  sense,  whiskey  would  be  regarded  as  having  a  high 
degree  of  utility  to  many  to  whom  it  is  by  no  means  beneficial  in  the  long 
run. 


MARGINAL    UTILITY.  79 

bread  received  in  the  course  of  a  day  has  almost  infinite 
utility  as  a  means  of  preserving  life.  The  second  has 
great  utility  as  a  means  of  avoiding  hunger,  but  not  so 
great  as  the  first ;  the  third  makes  less  difference  than  the 
second  ;  and  when  we  come  to  the  tenth,  the  added  grati- 
fication is  perhaps  hardly  appreciable.  So  it  is  to  a  greater 
or  less  degree  with  all  other  commodities.  Additional 
increments  in  quantity  do  not  bring  proportionate  increase 
of  enjoyment  or  utility.  The  total  utility  of  the  larger 
amount  is  greater  than  that  of  the  smaller,  but  the  mar- 
ginal '  utility  of  additions  to  the  supply  available  for  any 
individual  keeps  diminishing. 

§  93.  If  there  is  only  a  small  amount  of  a  commodity 
in  the  market  the  buyers  are  often  extremely  anxious  to 
add  to  their  consumption,  and  are  willing  to  pay  high 
prices.  If  the  amount  available  becomes  larger,  and  the 
most  urgent  needs  of  the  buyers  have  already  been  satisfied, 
the  holders  must  offer  inducements  to  those  whose  need  is 
less  urgent ;  that  is,  they  must  lower  prices  to  create  a  larger 
demand.  The  demand  for  cotton  at  ten  cents  a  pound 
comes  from  those  to  whom  the  utility  of  adding  to  their 
stocks  of  cotton  is  greater  than  the  sacrifice  involved  in 
earning  ten  cents,  or  in  giving  up  something  else  which 
the  ten  cents  might  purchase.'     The  demand  for  cotton 

'  Also  called  final  utility. 

*  Desire  alone  cannot  create  demand.  A  man  must  have  the  means  of 
payment ;  and  these  means  usually  come  from  the  supply  of  goods  or  services 
which  he  has  previously  sold.  If  producers  and  consumers  come  in  personal 
contact  with  one  another  each  man's  supply  of  commodities  which  he  sells 
becomes  a  demand  for  the  commodities  of  others  which  he  wants  to  buy. 
He  will  sell  his  goods,  and  increase  their  supply,  as  long  as  the  utility  of  what 
he  can  buy  at  the  market  rates  of  exchange  is  greater  than  that  which  he 
sacrifices  in  parting  with  his  own  products.  This  double  aspect  of  his  goods 
as  supply  and  demand  forms  the  basis  of  the  theory  of  reciprocal  detnand 
which  was  developed  by  Cairnes  in  popular  form  and  by  Walras  with  scientific 
accuracy. 

But  if  an  interval  elapses  between  the  time  when  a  man  makes  prices  for 
the  goods  which  he  sells  and  spends  the  money  thus  obtained  in  the  purchase 


8o  COMPETITION. 

at  nine  cents  comes  from  those  to  whom  its  utility  is 
greater  than  the  sacrifice  measured  by  nine  cents.  Each 
reduction  in  price  increases  the  amount  of  goods  whose 
utiHty  to  the  buyers  is  greater  than  that  which  is  measured 
by  the  price  charged  ;  that  is,  it  increases  the  demand. 
It  may,  however,  happen  that  the  stock  of  an  extremely 
useful  article  is  so  great  that  no  reduction  in  price  will 
serve  to  create  a  commercial  demand  for  the  whole. 
Water,  except  in  cities,  is  an  example  of  this.  The  total 
utility  of  water  is  enormous ;  but  if  there  are  already  a 
million  gallons  available,  the  marginal  utility  of  an  ad- 
ditional gallon  is  so  small  that  no  one  is  likely  to  pay  any- 
thing for  it,  and  there  is  no  commercial  demand  in  the 
proper  sense  of  the  word. 

This  is,  in  substance,  the  theory  of  demand  set  forth  by 
Jevons,  and  carried  out  in  detail  by  the  Austrian  school 
of  economists.  It  is  of  great  importance  as  showing  the 
direct  connection  between  utility  and  price  under  the 
existing  commercial  system.  It  explains  more  clearly 
than  previous  theories  have  done  the  psychological  mo- 
tives which  determine  the  relations  between  price  and  de- 
mand. Much  of  the  work  of  this  school,  however,  seems 
to  belong  rather  to  the  domain  of  psychology  than  of 
economics,  and  to  have  a  very  remote  application  to  the 
practical  problems  of  business  and  of  legislation. 
,  §  94.  The  demand  for  an  article  thus  depends  upon  its 
utility  as  estimated  by  the  consumers,  and  can  be  increased 
by  lowering  the  price.  To  dispose  of  any  given  supply 
the  holders  must  make  the  price  low  enough  to  create  a 
corresponding  demand. 

In  the  case  of  perishable  goods,  the  conditions  deter- 

of  other  goods,  the  theory  of  reciprocal  demand  ceases  to  work  smoothly. 
We  can  no  longer  say  without  much  reserve  that  "a  market  for  products  is 
products  in  market."  The  intervention  of  the  speculator  and  the  varying 
success  with  which  he  performs  his  work,  make  such  a  difference  in  the 
rapidity  of  exchange  that  they  cannot  be  ignored  in  the  discussion  of  price 
variations. 


r 


THE   SUPPLY  CURVE. 


8i 


mining  the  supply  are  comparatively  simple.  The  supply 
of  such  goods  is  substantially  the  same  as  the  stock 
brought  to  market.  If  a  thousand  quarts  of  strawberries 
come  into  the  hands  of  the  retailers  of  a  certain  city 
to  day  and  cannot  be  kept  till  to  morrow,  the  price  must 
be  made  low  enough  to  create  a  demand  for  the  thousand 
quarts,  even  though  such  a  price  be  wholly  unremunera- 
tive. 


O       iz3*-S67aai» 


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.  p 

p>    p     Pt 


But  if  an  article  be  of  a  more  permanent  character  and 
less  liable  to  deterioration,  it  will  not  be  necessary  to  sell 
the  whole  stock.  If  the  price  goes  too  low,  the  merchants 
may  hold  back  a  part  of  the  stock  in  the  hope  of  realizing 
higher  prices  in  the  future.  At  a  price  like  ten  cents  the 
merchants  would  try  to  sell  every  available  pound  of 
cotton  ;  at  nine  cents  they  would  not  wish  to  leave  them- 
selves wholly  bare,  but  would  reserve  a  little  for  future 
contingencies ;  at  eight  cents  they  would  reserve  more ; 
while  at  seven  cents  or  six  cents,  increasingly  large  shares 
of  the  product  would  be  held  back.  If  we  assume  the 
stock  of  unsold  cotton  in  New  York  to  be  100,000  bales, 
the  supply  might  be  o  at  five  cents,  10,000  at  six  cents, 
25,000  at  seven  cents,  40,000  at  eight  cents,  60,000  at  nine 
cents,  and  90,000  at  ten  cents.  On  this  basis  we  can  con- 
struct supply  curves,  similar  to  the  demand  curves  in 
Figuies  I  and  2  ;  and  can  then  combine  the  two  curves 
into  one  figure  as  in  Figure  3  or  Figure  4. 


8  2  COMPE  TTTION. 

§  95.  The  market  price  of  an  article  is  determined  by 
the  intersection  of  the  supply  and  demand  curves.'  The. 
price  for  cotton  in  Figure  3  will  be  eight  cents  a  pound, 
at  which  price  40,000  bales  will  be  offered  and  taken.  Any 
price  lower  than  this  will  produce  an  excess  of  demand 
over  supply,  and  the  competition  of  buyers  will  tend  to 
force  prices  upward  ;  any  price  higher  than  eight  cents 
will  produce  an  excess  of  supply  over  demand,  and  the 
competition  of  sellers  will  tend  to  force  prices  downward. 
Had  the  price  been  seven  cents  we  should  have  had 
buyers  for  50,000  bales  and  sellers  for  only  25,000;  had 
it  been  nine  cents,  we  should  have  had  sellers  for  60,000 
bales  and  buyers  for  only  30,000.  But  a  price  of  eight 
cents  will  just  clear  the  market.  There  will  be  no  one  left 
who  wants  to  sell  except  at  a  higher  figure,  or  to  buy  ex- 
cept at  a  lower  figure.  In  the  general  illustration  (Fig.  4) 
the  price  Op  is  determined  by  the  intersection  x  of  the 
curves  Z>Z>'  and  SS' .  This  is  the  point  at  which  the  quan- 
tities demanded  and  supplied  are  equal,  both  being  repre- 
sented by  the  line/^.  At  any  lower  price,  Opj,  the  demand, 
Pjdj,  exceeds  the  supply,  p^Sj,  and  produces  competition 
of  buyers;  at  any  higher  price,  Op^,  the  supply, /^  j'j,  ex- 
ceeds the  demand,  p^  dj,  and  produces  competition  of 
sellers. 

In  some  markets,  like  the  Berlin  Stock  Exchange,  this 
equalization  of  supply  and  demand,  instead  of  being  left 
to  individual  intelligence  in  competition,  is  performed  by 
a  committee,  which,  after  revising  all  the  bids  and  offer- 
ings for  the  day,  at  their  various  prices,  establishes  a 
settling  price  which  will  secure  the  maximum  number  of 
transactions  ;  a  price,  that  is  to  say,  which  leaves  the 
smallest  difference  between  the  amounts  wanted  by 
buyers  and  offered  by  sellers. 

§  96.  A  market  price,  as  thus  explained,  is  a  price  fixed 

'  The  case  of  a  perishable  article  may  be  represented  by  a  horizontal  sup- 
ply curve,  the  supply  being  a  fixed  quantity  whatever  the  price  offered. 


ITS  ADVANTAGES   TO    THE  PUBLIC.  83 

by  the  self-interest  of  buyers  and  sellers,  each  acting  inde- 
pendently— that  is,  with  free  competition  on  both  sides. 
The  price  thus  fixed  is  generally  an  advantageous  one  for 
society.  This  proposition  may  best  be  proved  by  con- 
sidering the  various  causes  which  may  defeat  the  action 
of  competition  and  observing  the  evils  which  result  from 
them. 

The  action  of  free  competition  may  be  defeated  by 
ignorance,  by  custom  (either  with  or  without  the  authority 
of  law  to  enforce  it),  and  by  combination. 

The  bad  effects  of  ignorance  hardly  need  proof.  An 
ignorant  buyer,  unfamiliar  with  the  market  rate,  is  liable 
to  be  charged  a  higher  price  on  account  of  that  un- 
familiarity.  This  results  in  uncertainty  with  regard  to 
prices,  and  redounds  chiefly  to  the  advantage  of  the  more 
unscrupulous  sellers,  who  will  make  money  by  deceiving 
those  who  deal  with  them.  A  one-price  system,  which  is 
a  most  important  element  in  commercial  honesty,  is 
secured  by  intelligent  competition  and  defeated  by 
ignorance. 

The  disadvantage  of  relying  on  custom  or  combination 
as  a  means  of  fixing  prices  may  easily  be  proved  in 
detail. 

§  97.  Suppose  that,  at  the  old  price,  the  supply  is  less 
than  the  demand,  but  that  custom  prevents  the  buyers 
from  competing  with  one  another  to  force  prices  up.  The 
low  price  continues  as  long  as  the  stock  lasts.  The  buyers 
get  what  there  is  at  the  old  price,  and  use  it  freely.  There 
is  no  apparent  motive  for  them  to  lessen  their  consump- 
tion, nor  is  there  any  motive  for  producers  to  send  a 
larger  supply  to  market.  After  a  time  the  stock  of  goods 
is  used  up,  and  we  have  distressing  scarcity  or  famine. 
The  temporary  gain  which  resulted  from  the  low  price  is 
more  than  offset  by  the  suffering  due  to  the  total  absence 
of  the  commodity  in  question.  But  if  the  buyers  are 
allowed  to  compete  and  to  force  prices  up  at  the  very 


84  COMPETITION. 

beginning  of  the  scarcity,  the  advancing  price  at  once 
operates  as  a  warning  to  use  the  article  economically. 
This  of  itself  causes  the  stock  to  hold  out  longer.  It  will 
also  generally  happen  that  the  advancing  prices  lead  the 
producers  to  send  more  goods  to  the  market  where  higher 
prices  prevail ;  and  that  long  before  the  advent  of  actual 
famine  new  sources  of  supply  are  developed  by  which  the 
severest  scarcity  is  avoided.  If  this  result  can  be  secured 
by  a  moderate  advance  in  price  it  is  worth  many  times 
what  it  costs.  For  it  must  be  remembered  that  high 
prices  are  not  so  much  an  evil  in  themselves,  as  an  indica- 
tion of  an  evil.  If  they  exist  in  an  open  market,  it  shows 
that  certain  needs  of  the  community  are  inadequately 
supplied.  It  often  happens  that  the  higher  prices  serve 
as  a  natural  cure  for  the  underlying  evil,  and  that  the 
effort  to  force  those  prices  down  by  custom  or  law  pre- 
vents the  evil  from  curing  itself.  If  custom  or  law  pre- 
vents buyers  from  paying  a  competitive  price,  it  soon 
means  that  some  buyers  must  go  without  things  they 
very  much  want. 

Where  for  any  reason  competition  cannot  or  will  not 
act,  it  is  sometimes  much  better  to  fix  prices  by  custom 
or  law  than  to  leave  them  to  the  results  of  special  bargain- 
ing. Each  city  has  its  rates  of  carriage  hire  established 
by  public  ordinance.  The  medical  practitioners  of  any 
given  locality  have  their  customary  scale  of  charges,  from 
which  professional  etiquette  forbids  them  to  depart.  In 
the  case  of  monopolies,  complete  or  partial,  like  docks, 
water-works,  or  railroads,  the  fees  for  their  use  are  not  in- 
frequently fixed  by  legislative  authority.  But  while  a 
system  of  established  rates  is  better  than  one  of  special 
bargains,  it  is  worse  than  one  of  free  competition  because 
it  does  not  ensure  an  adaptation  of  the  quantity  of  service 
to  the  needs  of  the  community.  The  effort  to  fix  railroad 
charges  by  law  results  in  low  rates  for  those  who  can  get 
the  needed  transportation  facilities  ;  but  it  often  curtails 


LOSSES  FROM  COMBINATION:  85 

the  construction  of  new  roads  and  the  development  of 
train  service  on  old  ones  to  such  a  degree  that  the  loss  to 
those  who  cannot  get  their  goods  to  market  overbalances 
the  gain  to  those  who  can. 

§  98.  Suppose,  on  the  other  hand,  that  at  the  old  price 
the  supply  is  in  excess  of  the  demand,  but  that  the 
sellers  are  enabled,  either  by  custom  or  combination,  to 
avoid  the  effect  of  competition  in  forcing  prices  down. 
The  sellers  get  the  old  price  for  what  is  actually  bought : 
but  the  purchases  continue  smaller  than  the  supplies,  and 
the  visible  stock  increases  up  to  the  limit  of  the  mer- 
chants' carrying  capacity.  One  of  two  things  must  happen. 
Either  a  part  of  the  accumulated  goods  will  deteriorate, 
and  a  useful  article  be  wholly  lost  to  the  community  ;  or 
there  will  come  a  time  when  there  is  such  a  glut  in  the 
market  that  enormous  stocks  are  sold  at  a  sacrifice  which 
causes  widespread  commercial  failure.  The  acts  of  the 
French  Copper  Syndicate  of  1888  furnish  a  good  ex- 
ample of  this  effect  of  non-competitive  prices.  This  syn- 
dicate succeeded  in  controlling  so  large  a  part  of  the 
copper  of  the  world  that  it  could  apparently  fix  its 
charges  to  suit  itself;  but  the  high  prices  interfered  de- 
cidedly with  the  use  of  copper,  and  although  the  increas- 
ing stocks  of  metal  could  be  carried  without  deterioration, 
the  financial  burden  ultimately  became  too  great  for  the 
largest  business  concerns  to  bear,  and  the  accumulations 
had  to  be  sold  at  panic  figures. 

Receding  prices  are,  as  a  rule,  the  effect  of  increased 
supply.  If  they  are  allowed  to  work  out  their  natural 
results,  they  bring  about  increased  use  of  the  article,  and 
prevent  the  large  supply  from  being  wasted  or  allowed  to 
deteriorate  ;  while  they  also  act  as  a  warning  to  producers 
not  to  increase  the  supplies  of  an  article  where  low  prices 
prevail.  They  may  seem  like  a  temporary  evil  to  mer- 
chants and  to  producers ;  but  it  has  been  proved  over 
and   over  again    that  the  attempt  to  stave  off  this  evil 


86  COMPE  TI TION. 

by  interfering  with  the  action  of  competition  makes  the 
disaster  worse  in  the  end. 

§  99.  Not  only  does  competition  tend  to  utiHze  the 
aggregate  product  of  the  community  to  advantage,  as 
shown  in  the  previous  paragraphs ;  it  also  tends,  on  the 
whole,  to  make  the  prices  of  different  articles  proportion- 
ate to  the  expense  of  producing  them. 

Suppose  that  the  market  price  of  iron,  as  fixed  by 
supply  and  demand,  is  insufficient  to  cover  the  expense 
of  producing  it.  No  investor  seeking  a  business  opening 
is  likely  to  go  into  the  production  of  iron,  nor  will  those 
already  engaged  in  the  business  increase  their  plant  or 
even  renew  it  when  it  wears  out.  If  at  the  same  time 
there  is  another  article,  for  instance  copper,  whose  market 
price,  as  fixed  by  supply  and  demand,  affords  a  large 
excess  over  the  expense  of  production,  new  investors 
will  seek  to  produce  copper,  while  those  already  engaged 
in  the  business  will  extend  their  plant  and  keep  it  up  to 
the  highest  standard  of  efificiency.  We  shall  see  a  dimi- 
nution of  the  output  of  iron  and  an  increase  of  the  out- 
put of  copper,  by  a  process  which,  though  not  generally 
involving  actual  transfer  of  capital  from  one  industry  to 
another,  amounts  to  the  same  thing  in  its  effect  on  the 
community.  The  permanent  supply  of  iron  being  dimin- 
ished, while  the  conditions  of  demand  remain  the  same, 
the  producers  will  be  able  to  charge  a  higher  price  and 
yet  dispose  of  the  total  product ;  while,  conversely,  the 
permanent  supply  of  copper  being  increased,  the  produ- 
cers will  be  forced  to  charge  a  lower  price  in  order  to  call 
forth  a  corresponding  demand.  This  process  will  go  on 
until  the  profit  in  the  production  of  copper  is  no  greater 
than  that  in  the  production  of  iron. 

§  100.  This  adjustment  actually  takes  place  among  the 
industries  of  the  country  as  a  whole.  There  is  a  constant 
supply  of  free  capital  and  labor  seeking  investment  in 
localities  and  industries  where  the  higher  profits  are  to  be 


NORMAL  PRICE.  87 

obtained,  and  not  entering  those  where  the  profits  are 
lower.  This  process  tends  to  force  down  the  prices  of 
products  in  Hnes  where  they  have  been  unfairly  high, 
and  to  maintain  or  increase  them  in  those  where  they 
have  been  disproportionately  low.  When  this  equalizing 
process  has  taken  place,  the  price  is  said  to  be  normal. 
A  normal  price  is  reached  when  the  product  has  so 
adjusted  itself  to  the  demands  of  consumers,  that  the 
market  price  affords  the  current  rate  of  profit  to  the 
producer  who  enjoys  no  extraordinary  advantage.  We 
may  contrast  market  and  normal  price  by  saying  that  a 
market  price  is  one  at  which,  for  the  moment,  the  supply 
is  equal  to  the  demand  ;  while  a  normal  price  is  one  at 
which,  as  long  as  the  existing  stage  of  the  arts  continues, 
the  production  is  likely  to  be  equal  to  the  consumption. 

Under  the  modern  industrial  system  there  is  first  a 
temporary  adjustment  of  the  demand  to  the  supply  by 
the  commercial  competition  of  merchants,  which  lowers 
(or  in  the  converse  case  raises)  the  price  to  make  it 
correspond  to  the  marginal  utility.  This  temporary  ad- 
justment results  in  market  price.  Then  there  is  a  more 
permanent,  though  less  accurate  and  universal,  adjust- 
ment of  the  supply  to  the  demand,  by  the  industrial  com- 
petition of  investors  which  lowers  (or  in  the  converse 
case  raises)  the  price  (and  the  marginal  utility)  until  it 
becomes  proportionate  to  expense  of  production.  This 
permanent  adjustment,  as  far  as  it  is  carried  out,  results 
in  an  approximation  to  normal  price. 

§  10 1.  The  adjustment  of  market  price  to  normal  price, 
by  changes  in  the  direction  of  business  activity,  is  a  fact 
of  cardinal  importance.  But  it  should  be  understood, 
from  the  very  outset,  that  the  process  is  a  rough  and  not 
an  accurate  one.  The  causes  which  prevent  it  from  being 
completely  carried  out  may  be  grouped  as  follows : 

(i)  Some  articles  are  absolutely  fixed  in  quantity, 
so  that  the  price  received  has  little  or  no  effect   on  the 


8  8  COMPE  TITION. 

supply.  Historic  autographs,  old  coins,  or  rare  postage 
stamps  cannot  be  said  to  have  any  normal  price,  since 
no  amount  of  labor  and  capital  can  honestly  duplicate 
them. 

(2)  A  larger  number  of  articles  and  services  are  under 
the  control  of  monopolies  which  strive  to  limit  the  supply 
in  such  a  way  as  to  maintain  high  profits.  A  railroad  may 
charge  high  rates  for  a  long  time  without  calling  a  com- 
petitor into  being ;  for  business  which  gives  unusual  profit 
to  one  road  may  afford  very  inadequate  remuneration  to 
more  than  one.  As  a  rule,  however,  the  effect  of  such 
monopolies  is  only  to  retard  and  not  to  destroy  the  forces 
of  industrial  competition  which  check  exorbitant  profits. 
More  will  be  said  of  this  when  we  come  to  examine  in 
detail  the  results  of  modern  industrial  combination. 

(3)  A  more  universal  difficulty  in  applying  the  theory 
of  normal  price,  arises  from  the  uncertainty  attaching  to 
the  phrase  "  expense  of  production  "  in  any  given  line  of 
business.  This  expense  varies  with  different  men,  differ- 
ent locations,  and  different  processes.  Are  we  to  take  the 
average  expense  of  production  as  the  standard  of  normal 
price,  or  the  expense  of  the  most  skilful  and  well-situated 
producer,  or  that  of  the  least  skilful  and  well-situated  ? 
This  will  depend  upon  the  line  of  business.  In  agricul- 
ture or  mining,  where  the  best  lands  can  only  meet  a  part 
of  the  demand,  the  community  must  habitually  pay  a 
price  high  enough  to  induce  owners  of  other  lands  or 
mines  to  enter  the  market  ;  a  price  which  affords  the 
owners  of  the  better  lands  or  mines  a  surplus  profit 
known  as  rent.  In  manufacturing,  on  the  other  hand, 
when  the  best  plants  can  increase  their  output  with  little 
restriction,  so  as  to  be  able  to  supply  the  whole  market,  it 
is  often  the  better  concerns  that  fix  the  price  and  the  worse 
ones  have  to  get  on  as  they  can.  In  general,  it  involves 
no  great  error  to  say  that  the  normal  price  of  any  article 
is  measured  by  the  expense  of  producing  additional  sup>- 


UNCERTAINTIES  IN  ADJUSTMENT.  89 

plies  on  the  part  of  those  who  go  into  business  without 
either  the  advantage  of  old  locations  or  the  disadvantage 
of  old  methods. 

(4)  Another  case  where  the  relation  between  cost  and 
price  is  obscured  is  seen  in  bye-products — incidental  results 

•  of  industrial  processes  which  have  been  established  for 
some  other  purpose.  If  a  furnace  is  engaged  in  reducing 
pyrites  for  the  sake  of  the  metal  which  it  contains,  its 
owners  find  themselves  left  in  possession  of  a  quantity  of 
sulphur  from  which  the  metal  has  been  separated.  This 
sulphur  is  a  bye-product,  not  a  main  object  of  the  busi- 
ness ;  its  owners  are  ready  to  sell  it  for  what  they  can  get 
without  attempting  to  figure  the  cost.  In  the  manufac- 
ture of  illuminating  gas,  coke  is  an  important  bye-product. 
If  there  is  much  demand  for  gas  and  little  demand  for 
coke,  the  latter  will  be  sold  by  the  gas  company  for 
almost  anything  it  can  get.  If  the  demand  for  coke 
becomes  greater,  it  may  come  to  be  treated  as  a  main 
product  of  the  business  ;  and  the  effort  to  determine  the 
normal  price  either  of  gas  or  of  coke  becomes  a  matter  of 
serious  doubt.'  When  a  large  concern  like  a  railroad  per- 
forms many  kinds  of  service  at  the  same  time,  it  is  often 
quite  impossible  to  say  which  of  its  services  is  to  be  con- 
sidered as  the  main  object  of  its  existence,  and  which  are 
to  be  treated  as  bye-products.  Under  such  circumstances 
the  determination  of  the  expense  and  the  normal  price  of 
any  individual  piece  of  work  becomes  quite  an  arbitrary 
matter. 

(5)  Another  difificulty  in  applying  the  theory  of  normal 
price  arises  from  the  fact  that  the  process  of  investment 
is  so  slow  that  new  inventions  may  often  create  a  new 
normal  price  before  theoriginal  adjustment  is  complete. 
This  is  especially  the  case  in  industries  involving  large 
capital.  If  a  factory  or  a  railroad  charges  too  high  a 
price,  it  may  be  some  years  before  a  competitor  is  found 

'  Mill :  "  Political  Economy,"  Book  iii.,  ch.  xvi. 


90 


COMPETITION. 


to  reduce  it ;  if,  on  the  other  hand,  too  many  competitors 
come  in,  it  will  be  a  number  of  years  before  they  can  drop 
out  again.  Under  these  circumstances,  the  price  may 
easily  remain  for  a  long  time  either  unfairly  high  or  un- 
fairly low,  without  effective  remedy  from  free  competition. 
§  I02.  In  spite  of  all  these  hindrances,  the  adjustment 
of  market  price  to  normal  price,  though  a  rough  and  slow 
process,  is  a  most  important  one  ;  and  the  efforts  to  ignore 
it,  whether  on  the  part  of  combinations  for  keeping  prices 
too  high  or  legislation  for  keeping  them  too  low,  have 
generally  resulted  in  signal  failure. 


§  103.  Let  Op  (Fig.  5)  represent  the  normal  price  of 
an  article,  and  px  the  quantity  which  will  ordinarily  be 
produced  and  consumed  at  that  price.  Let  Op^  repre- 
sent the  maximum  price  which  any  buyer  is  willing  to 
pay,  so  that  above  this  price  all  permanent  demand  ceases. 
Let  Opt  represent  the  minimum  expense  of  production  to 
the  most  advantageously  situated  producer,  so  that  below 
this  price  all  permanent  supply  ceases.  The  total  demand 
for  the  article  will  be  made  up  by  consumers  to  whom  its 
utility  ranges  from  the  price  represented  by  Opj  down  to 
that  represented  by  Op.  The  total  supply  of  the  article 
is  made  up  by  producers  to  whom  its  cost  ranges  from 
Op,  up  to  Op.  At  the  normal  price  the  amounts  of  this 
production  and  consumption  will  be  equal.  If  the  normal 
price  of  wheat   is  seventy-five  cents,  it  shows  that  the 


PRICE  AND    VALUE.  9 1 

number  of  consumers  to  whom  the  utility  of  the  wheat 
is  such  that  they  can  afford  to  give  seventy-five  cents  or 
more  just  takes  up  the  supply  which  the  producers  can 
afford  to  furnish  at  seventy-five  cents  or  less. 

Competition  by  making  a  one-price  system  enables  the 
consumers  whose  necessities  are  greatest  to  get  the  article 
for  less  than  they  would  be  willing  to  pay  in  an  emergency  ; 
it  also  enables  the  producers  whose  advantages  are  greatest 
to  charge  more  than  they  would  be  able  to  accept  if  hard 
pushed.  The  gain  to  the  consumers  by  this  process  is 
represented  by  pxp^ ;  the  gain  to  the  producers  by  pxpj. 
The  former  corresponds  in  a  very  rough  way  to  the  excess 
of  utility  over  price  ;  the  latter  corresponds  in  an  equally 
rough  way  to  the  excess  of  price  over  cost.' 

§  104.  A  price  is  a  fact.  A  value  is  an  estimate  of  what 
a  price  ought  to  be. 

The  word  value  is  used  in  a  number  of  wholly  different 
meanings,  but  this  idea  of  a  permanent  standard  or  cause 
of  price,  as  distinguished  from  a  temporary  or  accidental 
phenomenon,  lies  at  the  basis  of  them  all.  Sometimes 
value  is  used  in  the  sense  of  utility — for  instance,  when  I 
say  that  an  article  has  a  value  to  me  out  of  all  proportion 
to  the  amount  for  which  I  could  sell  it.'     Sometimes  it 

'  While  these  curves  of  normal  supply  and  demand  are  useful  for  purposes 
of  illustration,  they  are  often  misleading,  because  they  are  based  on  assump- 
tions rather  than  on  observations.  The  use  of  the  supply  curve  is  specially 
open  to  danger.  There  is  a  tendency  to  identify  the  area  pxpi,  with  eco- 
nomic rent  (ch.  ix.).  This  is  an  error.  Rent  is  the  excess  of  price  received 
over  the  actual  expense  of  the  several  producers.  The  area/;f//,  represents 
an  excess  of  price  received  over  the  hypothetical  expense  which  the  better 
producers  would  incur  if  the  worse  ones  went  out  of  business.  The  reduc- 
tion of  wages  incident  to  the  withdrawal  of  weaker  competitors  would  make 
the  expense  in  the  second  case  much  lower  than  in  the  first. 

In  the  more  complicated  cases  under  (2),  (4),  and  (5)  in  §  loi,  a  normal 
supply  curve  can  hardly  be  said  to  exist. 

'  An  estimate  of  this  kind  is  sometirries  called  subjective  value.  But  it  is 
better  to  use  the  terra  utility  to  avoid  the  confusion  which  would  otherwise 
arise. 


92  COMPETITION. 

means  purchasing  power  in  the  abstract,  as  distinct  from 
concrete  measures  of  this  power  ;  for  instance,  when  1  say 
that  an  article  has  value,  though  I  do  not  know  just  what 
its  price  may  be.  Sometimes  it  means  purchasing  power 
measured  in  commodities  instead  of  in  money.  In  coun- 
tries with  a  paper  currency  there  is  frequent  occasion  for 
using  the  word  in  this  sense.  If  the  currency  is  doubled 
by  act  of  the  legislature,  the  prices  of  goods  measured  in 
this  currency  will  tend  to  double  also ;  but  we  are  justi- 
fied in  saying  that  there  is  no  increase  of  real  value  corre- 
sponding to  this  change  in  nominal  price.  Sometimes  the 
term  value  means  average  probable  price.  If  I  say  that 
a  certain  railroad  stock  is  selling  below  its  true  value,  I 
simply  mean  that  in  the  long  run  it  is,  in  my  opinion, 
likely  to  command  a  higher  price  than  it  does  now.  Finally 
the  word  value  often  means  2i  proper  and  legitimate  price, 
as  distinct  from  an  unfair  or  extortionate  one.  The  last 
is  much  the  commonest  and  most  important  sense  of  the 
word  in  commercial  usage,  and  there  seems  to  be  no  good 
reason  against  our  adopting  it.  In  this  sense,  the  sub- 
stantive value  corresponds  exactly  to  the  adjective  worth. 
If  we  say  that  a  man  is  charging  a  higher  price  for  an 
article  than  it  is  worth,  we  mean  that  he  is  putting  the 
buyer  at  an  unfair  disadvantage. 

The  price  of  an  article  or  service,  in  the  ordinary  com- 
mercial sense,  is  the  amount  of  money  which  is  paid, 
asked,  or  offered  for  it.  The  value  of  an  article  or  service 
is  the  amount  of  money  which  may  properly  be  paid, 
asked,  or  offered  for  it.  A  theory  of  price  puts  us  in  a 
position  to  explain  the  transactions  of  commercial  life. 
A  theory  of  value  undertakes  to  pass  judgment  upon 
their  advisability  or  their  morality. 

§  105.  Value  being  essentially  an  ethical  term,  Ave  may 
have  as  many  different  theories  of  value  as  there  are  differ- 
ent views  of  business  ethics.  But  these  views  fall  under  two 
main  heads :  the  commercial  or  competitive  theory,  which 


TWO    THEORIES  OF    VALUE.  93 

bases  value  upon  what  the  buyer  is  willing  and  able  to  offer 
for  an  article;  and  the  socialistic  theory,  which  bases  it 
upon  what  the  article  has  cost  the  seller  in  the  way  of  toil 
and  sacrifice.  When  we  have  grasped  this  ethical  charac- 
ter of  the  controversy  between  the  commercial  and  social- 
istic theories,  we  seize  more  clearly  upon  the  points  which 
are  essential  to  the  adjudication  of  that  controversy.  The 
question  between  the  two  parties  is  not  primarily  one  of 
fact,  but  of  advisability ;  not  what  necessarily  determines 
value,  but  what  kind  of  a  price  we  shall  stamp  with  our 
approval  by  calling  it  a  value.  The  commercial  theory  is 
that  the  value  of  an  article  is  the  price  which  it  would 
command  under  a  system  of  free  and  open  competition,  as 
distinct  from  one  which  is  the  result  of  special  bargaining 
or  fraudulent  concealment.'  In  this  sense,  the  market 
price  represents  the  temporary  value  of  an  article,  and  the 
normal  price  represents  its  permanent  value.  The  advo- 
cates of  the  commercial  theory  hold  that  the  competitive 
system  serves  the  economic  interests  of  society  so  well, 
that  the  first  rule  of  business  morals  is  to  conform  thereto  ; 
and  that  the  demands  of  commercial  justice  are  generally 
satisfied  by  a  schedule  of  prices  made  under  the  influence 
of  fair  and  open  competition,  as  allowed  and  encouraged 
by  the  common  law  of  England  and  America. 

§  106.  From  this  view  of  commercial  justice  the  social- 
istic theory  dissents.  The  advocates  of  the  socialistic 
theory  say  that,  whatever  the  efTects  of  competition  may 
be  upon  society  as  a  whole,  its  relative  efTects  upon  difTer- 
ent  members  of  society  are  extremely  unfair.  Many  of 
those  who  do  the  most  disagreeable  work  have  the  least 
enjoyment  to  show  for  it.  This  the  socialists  hold  to  be 
contrary  to  the  principles  of  popular  government,  or  of 
enlightened  government  of  any  kind.  In  criticising  the 
results  of  free  competition,  they  emphasize  the  fact  that 
the  adjustment    of   price    to    expense   of   production    is 

'  The  "  Austrian  "  theory  of  value  is  nothing  more  than  the  commercial 
theory  carried  out  to  its  logical  conclusion. 


94  COMPETITION. 

extremely  imperfect ;  and  they  add  that  the  expense  of 
production,  as  measured  in  money,  is  a  very  different 
thing  from,  the  cost  of  production,  measured  in  the  labors 
and  sacrifices  of  the  producer.  They  think  that  the 
increased  extent  of  modern  competition  intensifies  this 
divergence  between  cost  and  expense,  because  it  brings  in 
labor  of  different  grades  of  efficiency  to  supply  the  same 
market,  and  forces  men  to  accept  the  same  price  under 
increasingly  different  conditions  of  supply.  They  hold 
that  the  rendering  of  labor  constitutes  the  only  just 
ground  for  charging  prices  and  the  only  just  basis  for  esti- 
mating values.  This  basis  they  believe  to  be  habitually 
ignored  or  defied  in  the  processes  of  modern  trade.  They 
think  that  trade  involves  an  effort  to  buy  goods  for  less 
than  their  value  and  to  sell  them  for  more  than  their 
value ;  that  the  profits  of  traders  and  capitalists  of  every 
kind  represent  money  unfairly  extorted  from  consumers 
or  withheld  from  producers  ;  and  that  society  must  employ 
some  organized  means  to  prevent  this  extortion,  and  not 
let  the  trader  take  advantage  of  his  power  to  fix  prices  to 
suit  himself. 

§  107.  That  there  is  an  obvious  inequality  in  the  re- 
turns under  the  existing  commercial  system  of  payment 
may  readily  be  granted.  None  but  the  blindest  optimist 
will  deny  that  many  of  the  men  who  do  the  most 
disagreeable  work  have  the  least  comfort  to  show  for 
it.  The  socialists  are  justified  in  asserting  that  there  is 
an  inconsistency  between  our  political  doctrine  of  equal 
rights  to  the  pursuit  of  happiness  for  everybody,  and  the 
facts  of  the  industrial  world,  as  we  see  them  about  us. 
But  when  they  come  to  formulate  a  positive  theory  or 
standard  of  value,  they  give  us  something  which,  if 
carried  into  practice,  would  be  inconsistent,  to  a  far  greater 
degree  than  is  the  existing  system,  with  the  political 
doctrines  of  a  free  commonwealth  and  with  the  chances 
of  happiness  for  its  citizens. 


THE   SOCIALISTIC   THEORY.  95 

If  we  attempt  to  reward  every  one  according  to  his 
labor,  we  are  at  once  brought  face  to  face  with  the  danger 
that  people  will  make  the  wrong  things.  Give  free  choice 
of  occupation  under  this  system,  and  we  should  at  once 
have  an  overplus  of  painters  and  musicians,  with  a  defi- 
ciency of  farmers  and  mechanics.  It  would  be  necessary 
for  the  government  authorities  to  regulate  the  number 
who  should  engage  in  each  occupation — a  method  which 
would  be  subject  to  the  gravest  industrial  and  political 
dangers. 

The  free  choice  of  employment  under  the  modern  com- 
petitive system,  while  it  doubtless  increases  the  inequali- 
ties of  return  within  the  same  trade,  diminishes  the 
inequalities  of  return  between  different  trades,  and  gives 
able  men  in  underpaid  industries  or  localities  a  chance  to 
better  their  condition  by  a  change.  If  the  numbers  em- 
ployed in  different  trades  were  regulated  by  public 
authority,  the  chances  for  such  movement  would  be  much 
reduced.  The  possibilities  which,  under  the  commercial 
system,  are  open  to  a  man  of  real  ability,  even  under 
unfavorable  circumstances,  would  under  the  socialistic 
system  be  confined  to  those  who  could  command  excep- 
tional political  influence. 

§  108.  There  is  another  even  greater  danger  inherent 
in  the  socialistic  theory  of  value.  It  takes  away  the  pre- 
mium for  efficiency.  It  makes  a  man's  claims  for  reward 
depend  not  upon  what  he  has  done  for  others,  but  upon 
how  he  has  occupied  himself.  Time  wasted  counts  for  as 
much  as  time  spent.  This  is  a  difficulty  which  the  leaders 
of  socialistic  thought  have  in  vain  tried  to  meet.  To  say, 
as  Marx  does,  that  value  depends  on  the  quantity  of 
socially  necessary  labor  represented  by  an  article,  intro- 
duces two  conflicting  standards.  Social  necessity  is  a 
quality  which  varies  in  degree — a  fact  whose  consequences 
Marx  fails  to  take  into  account.  How  shall  we  rate  an 
article  which  embodies  a  little  labor  with  a  great  degree 


96  COMPETITION. 

of  social  necessity,  as  compared  with  one  which  embodies 
a  great  deal  of  labor  with  a  less  degree  of  social  neces- 
sity ?  If  we  deem  the  producers  of  the  former  article 
worthy  of  the  higher  award,  we  reintroduce  the  com- 
mercial standard  of  value  under  a  new  guise.  But  if 
we  reward  the  producers  of  the  article  which  represents 
much  labor  and  little  social  necessity,  we  take  away  all 
inducement  for  the  efficient  or  wise  application  of  labor 
and  capital.  The  commercial  theory  of  value  has  the 
inestimable  advantage  of  giving  a  man  a  motive  for  effi- 
cient work  by  the  best  methods.  Success  and  power  are 
made  dependent  on  doing  as  much  as  you  can,  with 
the  least  possible  waste.  It  is  by  this  process  that  capital 
is  accumulated  and  fortunes  made.  The  socialists  are 
wrong  in  regarding  trade  as  robbery.  Individual  instances 
there  may  be  which  lend  color  to  this  idea;  but  those 
instances  are  far  from  being  the  rule.  If  a  man  obtains 
a  large  income,  in  nine  cases  out  of  ten  it  is  because 
he  furnishes  something  which  society  wants ;  if  this 
income  leaves  him  a  large  margin  of  profit,  it  is  because  he 
has  known  how  to  economize  social  force  in  doing  the 
work.  The  theory  of  value  and  of  commercial  justice 
which  puts  a  premium  on  work  of  this  kind  is  far  better 
for  the  community  than  that  which,  in  its  pursuit  of  dis- 
tributive equity,  is  ready  to  sacrifice  collective  efficiency 
and  economy. 


CHAPTER  IV. 

SPECULATION. 

Gambling — Insurance — Commercial   Speculation — Legitimate  and  Illegiti- 
mate Transactions— Industrial  Speculation — Functions  of  the  Capitalist. 

§  109.  We  have  thus  far  studied  some  of  the  principles 
which  regulate  compensation  for  goods  and  services.  We 
have  now  to  deal  with  those  which  regulate  compensation 
for  risk. 

The  first  case  to  be  considered  is  that  of  gambling.  If  A 
agrees  to  pay^  a  dollar  in  the  event  that  a  coin, tossed  into 
the  air,  turns  up  heads,  and  B  agrees  to  pay  A  the  same 
amount  in  the  other  event,  we  have  a  transaction  which 
gives  each  party  an  equitable  compensation  for  the  risk 
involved.  Yet  the  moral  sense  of  the  community  disap- 
proves of  dealings  of  this  kind,  and  the  law  does  what  it 
can  to  discourage  them.  The  courts  will  not  enforce  such 
contracts,  and  the  public  authorities  usually  try  to  stop 
people  who  make  a  living  in  this  way.  The  more  en- 
lightened the  community,  the  more  decided  is  the  moral 
disapproval,  and  the  more  persistent  are  the  attempts  to 
enforce  legal  prohibitions  of  lotteries,  policy  shops,  and 
book-making  establishments. 

§  1 10.  We  saw  in  the  last  chapter  that  successive  ex- 
penditures on  the  part  of  any  individual  were  accompanied 
by  diminishing  additions  to  his  enjoyment.  The  first 
hundred  dollars  of  a  man's  income  represents  a  difference 
between  life  and  death.  The  second  hundred  is  a  matter 
of  less  absolute  necessity.     The  third  represents  an  in- 

97 


98  SPECULA  TION. 

crease  of  comfort  which  is  still  great,  but  not  equally  in- 
dispensable. When  it  comes  to  the  tenth  hundred  it  is  a 
question  of  enhanced  enjoyment ;  at  the  twentieth,  it  per- 
haps becomes  a  matter  of  luxuries  only.  In  general,  we 
have  a  diminishing  scale  of  utility  for  each  additional 
hundred  dollars  as  the  income  itself  gets  larger  and 
larger. 

If  a  man  with  an  income  of  $1000  a  year  bets  $500  on 
an  event  which  is  in  equal  degree  likely  to  happen  or  not 
to  happen,  and  then  wins,  he  finds  himself  with  $1500  in- 
stead of  $1000.  If  he  loses,  he  has  $500  instead  of  $1000. 
His  loss  of  comfort  and  efficiency  in  the  latter  case  far 
outweighs  his  gain  in  the  former.  A  risk  which  appears 
equitable  when  measured  in  dollars  and  cents,  is  very  in- 
equitable when  measured  in  the  comforts  which  that  man 
can  command  for  himself  and  his  family.  He  is  risking 
the  loss  of  a  larger  amount  of  comfort,  for  an  even  chance 
of  gaining  a  smaller  amount. 

When  a  man  stakes  a  large  percentage  of  his  income  in 
this  way,  it  is  easy  to  see  that  gaming  is  folly.  The  apol- 
ogists for  gambling  say  that  they  risk  such  small  propor- 
tions of  their  income,  that  the  difference  in  utility  between 
equal  money  gains  or  losses  is  very  slight,  and  that  the 
pleasure  of  the  excitement  in  the  hazard  outweighs  any 
such  trifling  difference.  This  is  in  many  instances  true  ; 
but  it  is  also  true  that  in  a  large  number  of  instances 
people  do  not  know  when  to  stop  ;  that  under  the  stress 
of  excitement  they  risk  very  considerable  proportions  of 
their  money  (not  to  speak  of  cases  where  they  risk  other 
people's  money  also) ;  that  the  losses  represent  losses  of 
comfort  and  self-respect,  while  the  gains  are  spent  in 
luxury  or  carousal.  Under  these  circumstances,  the  pub- 
lic is  fully  warranted  in  holding  that  gambling  contracts 
are  against  public  policy.  It  is  a  public  misfortune  to 
have  people  hazard  their  fortunes  in  this  way  ;  and  the 
man  who  makes  a  living  by  persuading  other  men  to  take 


INSURANCE.  99 

such  risks  on  terms  advantageous  to  himself,  whether  in 
gaming,  horse-racing,  or  lotteries,  is  worse  than  a  parasite 
on  society. 

§  III.  Let  us  now  contrast  the  workings  of  insurance. 
In  this  case  also  the  contract  is  a  wager.  A  house  owner 
pays  an  insurance  company  fifty  dollars,  in  return  for 
which  he  is  to  receive  five  thousand  dollars  in  case  his 
house  burns  down  within  a  specified  time ;  just  as  he 
might  pay  a  bookmaker  fifty  dollars  and  receive  five 
thousand  in  case  a  specified  horse  wins  a  race.  But  the 
motives  and  effects  in  the  two  cases  are  wholly  different. 
The  man  who  wins  in  betting  on  horses  secures  an  addi- 
tion to  his  income  which  means  increased  luxury  ;  the 
man  who  has  insured  a  house  that  burns  down  prevents 
the  distress  to  his  family  consequent  upon  the  loss  of  a 
home.'  In  like  manner,  the  man  who  has  insured  his  life 
makes  small  annual  payments  at  a  time  when  he  can  do  so 
without  encroaching  on  the  comfort  of  his  family  ;  thereby 
assuring  to  that  family,  in  the  event  of  his  death,  a  pay- 
ment of  money  at  a  time  when  the  loss  of  the  earning 
power  of  its  head  might  otherwise  mean  want  and  destitu- 
tion. Insurance  puts  money  where  it  is  needed,  instead 
of  putting  it  where  it  is  not  needed  ;  where  it  has  the 
highest  utility  to  the  individual  and  to  society,  instead  of 
the  lowest ;  where  the  possibility  of  securing  it,  instead 
of  being  a  means  of  demoralizing  excitement,  becomes  a 
source  of  security  and  of  industrial  efficiency.  Hence  the 
insurance  company  in  protecting  the  individual  insurer 
against  losses  to  himself  and  his  family  from  fire,  accident, 
or  death,  is  rendering  a  public  service  ;  and  the  profits  of 
such  a  company,  unlike  those  of  the  bookmaker  or  the 

'  If  a  man  insures  a  house  in  which  he  has  no  interest,  or  insures  his  own 
house  beyond  its  real  value,  the  transaction  comes  very  close  to  gambling 
and  is  discountenanced  both  by  the  insurance  companies  and  the  law  ;  not 
simply  or  primarily  because  it  is  a  gambling  transaction,  but  because  it  leads 
to  fraud  and  arson. 


100  SPECULA  TION. 

lottery,  are  honestly  earned  by  an  actual  contributjon  to 
the  public  wealth. 

§  112.  Commercial  speculation  is  sometimes  analogous 
to  insurance,  and  sometimes  to  gambling.  In  the  former 
case  it  is  said  to  be  legitimate,  in  the  latter  it  is  said 
to  be  illegitimate.  But  the  legitimate  and  illegitimate 
transactions  are  so  much  alike  in  their  form'  and  so  inex- 
tricably mingled  in  practice,  that  it  is  often  extremely 
hard  to  draw  the  line  between  them. 

§  1 13.  A  large  speculative  element  is  involved  in  trade  of 
every  kind.  The  trader  seeks  to  buy  articles  at  as  low  a 
price  as  he  can  and  to  sell  them  at  a  higher  price.  He  may 
do  this  either  by  buying  them  in  a  market  where  they  are 
cheap  and  selling  them  in  a  market  where  they  are  dearer ; 
or  by  buying  them  at  a  time  when  they  are  cheap  and  sell- 
ing them  at  a  time  when  they  are  dearer.  The  difference 
between  his  buying  and  selling  prices  represents  his  profit 
on  the  transaction.  The  uncertainty  attaching  to  the 
amount  of  such  profit  makes  the  operation  a  speculative 
one.  There  is  a  serious  risk  of  loss,  which  the  trader 
assumes  for  the  sake  of  a  possible  gain.  Unless  we  can 
prove  that  the  gains  are  honestly  earned  by  some  service 
to  society,  we  shall  be  forced  to  regard  them  as  little 
better  than  book-makers'  profits. 

Those  who  hold  the  socialistic  theory  of  value  regard 
trade  as  a  dangerous  occupation,  which  affords  almost 
irresistible  temptations  to  dishonesty.  Believing,  as  they 
do,  that  the  value  or  just  price  of  an  article  depends  on 
the  labor  embodied  in  it,  they  see  in  trade  a  constant 
effort  to  buy  articles  for  less  than  their  value  and  to  sell 
them  for  more  than  their  value  ;  an  effort  in  which  the 
trader's  superior  shrewdness  often  enables  him  to  cheat 
both  producer  and  consumer.  In  that  form  of  trade  where 
articles  are  bought  in  one  place  and  sold  in  another,  they 
admit  that  the  trader  may  do  a  necessary  work  of  distribu- 
tion which  increases  the  value  or  just  price  of  the  goods 


SERVICES   RENDERED  BY   TRADE.  lOI 

in  question,  so  that  a  part  of  the  profit  of  this  form  of 
trade  is  legitimate.  But  in  that  form  of  trade  where 
articles  are  bought  at  one  time  and  sold  at  another,  they 
deny  that  there  is  any  service  rendered  which  increases 
the  value  of  the  goods,  and  they  hold  that  all  profit  ob- 
tained by  this  means  is  unjust  and  extortionate.  In 
mediaeval  times,  when  the  socialistic  theory  of  value  was 
generally  accepted,  all  trade  was  regarded  with  a  suspicious 
eye :  and  the  attempt  to  buy  an  article  when  it  was  cheap, 
with  a  view  to  selling  it  when  it  became  dear,  was  visited 
with  the  severest  penalties. 

§  1 14.  But  those  who  hold  the  commercial  theory  of 
value  believe  that  trade  renders  a  service  to  society,  inde- 
pendent of  the  labor  of  distribution  ;  and  that  this  service 
is  of  essentially  the  same  character,  whether  the  sale  be 
made  in  a  different  market  or  in  the  same  market.  They 
hold  that  the  work  of  the  trader,  in  acquiring  goods  when 
they  are  cheap  and  parting  with  them  when  they  are  dear, 
results  in  an  increase  of  their  utility  to  the  public.  If  an 
article  is  unusually  cheap,  it  means  that  the  supply  is 
unusually  great  and  the  utility  of  additions  to  the  supply 
less  than  it  ordinarily  is.  If  it  is  unusually  dear,  it  means 
that  the  supply  is  unusually  small,  and  the  utility  of 
additions  to  the  supply  greater  than  it  ordinarily  is. 
If  wheat  stands  at  50  cents  a  bushel,  the  need  for  addi- 
tional wheat  is  small;  if  it  stands  at  $1.00  a  bushel,  the 
need  for  additional  wheat  is  great.  The  man  who  with- 
draws wheat  from  the  market  in  the  former  case  and  is 
thus  enabled  to  add  it  to  the  supply  in  the  latter,  serves 
the  wants  of  society.  Nor  is  it  true,  as  might  at  first  sight 
appear,  that  he  is  enabled  to  appropriate  to  himself  by 
the  higher  price  the  whole  benefit  of  the  increased  utility. 
If  any  considerable  quantity  of  wheat  is  bought  by  the 
traders  at  the  lower  figure  for  future  sale,  it  will  increase 
the  demand  and  make  the  present  price  higher  than  50 
cents ;  while  the  supply  thus  made  available  when  wheat 


102 


SPECULA  TION. 


becomes  scarce  will  prevent  the  future  price  from  reach- 
ing $i.oo. 

§  115.  Let  DD'   (Fig.  6.)   be   the   demand   curve    for 


tOWKt 

laoae 

16000 

1*000 
nooo 
10000 


3-. 


so    to     70    ao    ao    /o» 


wheat  in  a  certain  market  where  10,000  bushels  a  week 
would  be  taken  at  a  dollar  a  bushel,  but  where  20,000 
bushels  a  week  could  not  be  disposed  of  except  by  redu- 
cing the  price  to  fifty  cents.  If  a  single  trader  stores  away 
a  few  bushels  of  wheat  when  it  is  plenty,  and  sells  it  when 
it  is  scarce,  he  hardly  affects  the  price  to  the  producer  or 
the  consumer,  and  can  in  that  case  realize  nearly  the 
whole  gain  for  himself.  But  his  success  will  teach  others 
to  follow  his  example.  Now  if  he  and  other  traders  store 
away  2,000  bushels  a  week  in  time  of  plenty,  they  so  re- 
duce the  amount  for  immediate  consumption  that  the 
ruling  price  at  that  time  is  sixty  cents  instead  of  fifty ; 
while  by  selling  this  same  wheat  in  time  of  scarcity,  they 
increase  the  supply  so  that  the  ruling  price  only  goes  up 
to  about  ninety  cents.  If  the  traders  withdraw  4,000 
bushels  a  week  in  times  of  plenty,  and  thus  provide  an 
increased  supply  for  times  of  scarcity,  it  is  probable  that 
they  will  have  to  pay  seventy  cents  for  what  they  buy, 
and  only  get  eighty  cents  when  they  sell  it — a  difference 
which  may  little  more  than  pay  them  for  the  cost  of 
carrying  the  wheat.  The  more  fully  the  traders  seek  to 
take  advantage  of  differences  in  price,  the  narrower  is  the 


THE  PROFITS  OF   TRADE. 


103 


margin  they  can  realize  for  themselves.     In  general,  if  a 
supply  Oq^  (Fig.  7)  will  only  command  a  price  Op„  while 


Q                               \^ 

X, 

\, 

Fitj.f 

\ 

\, 

> 

P 

PiPt  Pi  Pt-      Pi  P* 


a  supply  Oqt,  will  command  a  price  Ope,  it  means  that 
the  need  of  increased  supplies  in  the  latter  case  is  greater 
than  in  the  former,  and  that  any  man  supplying  that  need 
renders  society  a  corresponding  service.  If  a  trader  with- 
draws a  small  quantity  q^q^  in  time  of  plenty  and  sells  it  in 
time  of  scarcity,  the  extremes  of  price  variation  are  Opj 
and  Opj,  and  the  trader  is  able  to  realize  the  difiference/;,^^. 
But  if  the  traders  reserve  a  larger  quantity  ^^^  and  corre- 
spondingly increase  the  supply  from  Oq^  to  Oq^  in  time 
of  scarcity,  the  extremes  of  price  will  be  Op^  and  Op^ 
This  leaves  only  a  small  margin  p^p^  per  bushel  for  the 
traders  (instead  oi  p^p^,  as  in  the  former  case),  and  leaves 
a  much  larger  part  of  the  gain  to  society  for  the  benefit 
of  producers  and  consumers.  Anything  which  tends  to 
prevent  fluctuation  in  price  renders  a  service  in  putting 
goods  where  they  are  needed — a  service  which  has  an 
effect  on  the  public  wealth  far  greater  than  can  be 
measured  by  any  of  its  effects  on  the  private  wealth  of 
individuals. 

§  1 16.  If  the  traders  can  compare  accurately  the  rela- 
tions of  supply  and  demand  in  different  markets,  they 
will  all  try  to  put  the  supply  where  it  is  most  needed,  as 
long  as  the  difference  in  price  is  likely  to  cover  the  cost 


104  SPECULA  TION. 

of  transfer.  The  profits  from  trade  of  this  kind  are  small, 
and  relatively  sure.  But  if  no  such  accurate  comparison 
can  be  made,  the  trader's  possible  profits  are  much  larger, 
while  the  risks  and  uncertainties  are  at  the  same  time 
greater.  The  transaction  in  this  case  becomes  a  more 
speculative  one. 

§  I  ly.  Down  to  the  present  century,  a  large  part  of  the 
speculative  profits  were  made  by  taking  advantage  of  dif- 
ferences of  price  in  different  places — chiefly  in  connection 
with  foreign  trade.  The  means  of  communication  and 
transport  were  so  defective  that  there  was  often  a  great 
scarcity  of  an  article  in  one  region  and  an  abundance  of 
the  same  article  in  another.  The  shipowners  who  moved 
the  article  from  the  latter  place  to  the  former  had  a  chance 
of  enormous  profits.  But  the  business  was  also  attended 
with  great  risks.  Transportation  was  far  less  safe,  either 
from  the  elements  or  from  human  violence,  than  it  is  to- 
day. There  was  no  telegraph,  no  good  postal  service,  no 
efficient  protection  from  pirates  by  sea  or  highway  rob- 
bers by  land.  All  these  causes  combined  to  render  the 
arrival  of  goods  so  uncertain  that  the  very  wages  of  the 
seamen  were  made  contingent  upon  the  safe  delivery  of 
the  cargo,  and  the  whole  body  of  sailors  thus  became 
participants  in  the  speculation. 

The  nineteenth  century  has  witnessed  a  change  in  these 
respects.  Improved  means  of  communication  have  greatly 
lessened  the  differences  in  price  in  different  markets.  It 
is  no  longer  possible  to  have  a  glut  of  wheat  in  Chicago 
and  a  scarcity  in  Liverpool.  The  modern  post-office  and 
the  telegraph  furnish  prompt  information  of  what  is  going 
on  all  over  the  world,  and  enable  merchants  to  know  where 
goods  are  most  needed.  The  steamship  and  the  railroad 
furnish  a  quick  and  safe  means  of  placing  the  goods  where 
they  will  meet  such  needs  as  may  arise.  The  difference 
of  price  of  any  staple  article  in  two  large  wholesale 
markets  will  not  generally  be  much  greater  than  the  cost 


CONTRACTS  FOR  FUTURE  DELIVERY.  105 

of  transportation  from  one  to  the  other.  So  moderate 
have  the  profits  from  this  source  become,  that  the  busi- 
ness of  those  who  try  to  secure  them  is  now  known  as 
arbitrage  rather  than  speculation.  Only  in  the  trade  with 
barbarous  or  half-civilized  races  does  foreign  commerce 
retain  its  character  as  an  extra-hazardous  business. 

§  118.  The  speculator  of  to-day  makes  his  ijioney 
chiefly  by  taking  advantage  of  differences  of  price 
between  different  times,  rather  than  between  different 
markets.  It  is  not  so  much  the  difference  in  the 
price  of  wheat  in  Chicago  and  in  Liverpool  which  fur- 
nishes the  source  of  his  profits,  as  the  difference  between 
its  price  in  Chicago  this  month  and  next  month.  If  the 
speculator  foresees  a  rise,  he  buys  wheat  to-day  with 
the  hope  of  selling  at  an  advance.  If  he  foresees  a 
fall,  he  contracts  to  make  future  deliveries  at  to-day's 
prices,  in  the  hope  that  he  can  secure  the  means  of  filling 
those  contracts  at  rates  low  enough  to  leave  him  a  profit. 
This  is  the  type  of  transaction  which  forms  the  bulk  of 
the  business  on  all  the  leading  exchanges  of  the  world. 

§  119.  When  such  speculation  anticipates  an  actual 
demand,  it  is  of  great  service  to  the  community,  The 
long  time  which  elapses  between  production  and  consump- 
tion, between  contracts  and  their  fulfilment,  makes  it 
extremely  important  to  have  responsible  men  to  antici- 
pate the  wants  of  the  market  and  take  the  risks  on  their 
own  shoulders.  If  I  wish  to  build  a  house,  I  ask  a  builder 
to  give  me  an  estimate  of  the  cost.  He  in  turn  goes  to 
dealers  in  lumber  and  other  materials  and  asks  them  to 
tell  at  what  price  they  will  deliver  him  the  goods  when  he 
wants  them.  In  this  way  he  knows  approximately  what 
it  will  cost  to  build  the  house.  The  lumber  dealer  prob- 
ably contracts  to  deliver  lumber  which  is  not  now  in  his 
possession.  But  if  he  understands  his  business  he  knows 
more  accurately  than  any  one  else  what  its  future  price  is 
likely  to  be.     He  habitually  makes  a  profit  by  his  superior 


I06  SPECULA  TION. 

knowledge ;  but  this  profit  is  far  less  than  the  loss  which 
would  be  involved  if  every  builder,  at  the  time  of  making 
a  contract,  had  to  buy  all  the  lumber  he  was  going  to 
want  six  months  hence,  leaving  his  capital  (and  the  com- 
munity's capital)  unproductive  for  that  length  of  time, 
besides  being  subject  to  the  dangers  of  loss  by  fire. 

Nor  does  this  case  illustrate  the  full  measure  of  service 
which  legitimate  speculation  is  able  to  render  the  com- 
munity. Suppose  that  the  cotton  crop  of  this  year  is  an 
unusually  small  one.  The  price  will  go  up,  the  amount  of 
manufacture  lessen.  But  the  cotton  brokers  foresee  that 
next  year's  crop  will  be  larger.  They  therefore  contract 
to  make  future  deliveries  at  lower  rates.  The  manufac- 
turers do  not  need  to  buy  raw  material  in  advance  of 
their  actual  wants.  They  use  up  the  whole  old  stock  just 
as  the  new  crop  comes  in  ;  and  the  mercantile  community 
gradually  accumulates  other  reserves  from  this  large  crop 
which  may  become  available  for  use  in  a  year  of  scarcity. 
The  effect  of  such  speculation  is  to  equalize  the  supply 
of  cotton  in  different  years,  and  to  render  its  price 
comparatively  steady.  More  steady  price  makes  larger 
consumption  and  manufacture  for  consumption  ;  it  there- 
fore tends  to  increase  the  total  quantity  demanded  and 
to  benefit  producers  also.  If  we  compare  the  prices  of 
the  present  day  with  those  prior  to  the  development 
of  speculative  activity,  we  find  that  the  margin  between 
amounts  paid  to  producers  and  those  charged  to  consumers 
is  much  narrower  now  than  it  was  before.  Part  of  this 
difference  is  due  to  cheap  transportation ;  but  a  part 
is  due  to  the  action  of  speculators  in  minimizing  the  effect 
of  variations  in  production  upon  prices  paid  to  the 
producer. 

§  120.  This  is  the  effect  of  legitimate  speculation — antici- 
pating movements  of  supply  and  demand  and  taking  fair 
risks.  Unfortunately  there  is  a  mass  of  speculation  which 
is  not  legitimate — which  is  either  pure  gambling  or  some- 


T 

0- 


MARGINS.  107 

thing  worse.  If  a  man  goes  into  the  purchase  of  grain  or 
cotton,  not  because  he  foresees  that  it  will  be  wanted,  but 
for  the  excitement  of  the  wager,  he  is  doing  the  same 
kind  of  business  as  the  man  who  bets  on  a  horse-race 
or  on  cards.  The  amount  of  these  gambling  transactions 
veiled  under  the  forms  of  commerce  has  become  very 
large.  In  many  cases  it  has  assumed  the proportione  of  a 
public  evil. 

The  sales  of  certain  commercial  staples,  such  as  wheat, 
cotton,  or  petroleum,  in  the  New  York  market  are  in 
some  years  fifty  times  as  great  as  the  actual  deliveries. 
Of  the  transactions  in  stocks,  perhaps  an  equally  small 
proportion  represent  purchases  for  investment.  A  large 
part  of  such  sales  and  purchases  are  made  on  margins ; 
the  buyer  not  paying  or  intending  to  pay  the  full  amount, 
but  depositing  with  his  broker  a  sufficient  sum  to  secure 
the  latter  from  loss,  and  receiving  or  paying  at  the  com- 
pletion of  the  transaction  an  amount  corresponding  to  the 
change  in  price  of  the  commodity  purchased.  The  nar- 
rower the  margin,  the  greater  is  the  chance  of  gain  or  loss 
in  proportion  to  the  capital  invested,  and  the  higher  are 
the  stakes  to  the  gambler  on  either  side. 

Here,  as  elsewhere,  high  stakes  constitute  a  temptation 
to  unfair  play.  If  the  outside  public,  as  frequently  hap- 
pens, has  bought  securities  or  produce  in  the  ill-grounded 
hope  of  a  rise  in  price,  the  professional  operators  will 
speculate  for  a  fall  and  try  to  ensure  its  advent  by 
spreading  false  reports  of  everj'-  kind.  If,  on  the  other 
hand,  a  large  number  of  operators  have  made  contracts 
to  deliver  securities  or  produce  which  they  do  not 
possess,  a  few  men  with  large  capital  will  often  try  to  lock 
up  the  whole  available  supply  of  such  commodities,  and 
compel  those  who  have  made  the  contracts  to  purchase 
the  means  of  filling  them  at  an  exorbitant  figure.  Such 
an  operation  is  known  as  a  corner  ;  and  its  success  is  made 
possible  by  the  number  of  speculative  contracts  which 


I08  SPECULA  TION. 

must  be  filled  within  a  limited  period  of  time.  The  man 
who  thus  attempts  to  manipulate  the  market,  lowering 
prices  by  false  reports  or  raising  them  by  factitious 
scarcity,  is  doing  the  same  kind  of  business  as  a  man  who 
"  pulls "  horses  or  stacks  cards.  In  fact,  he  is  doing 
worse ;  for  the  men  who  suffer  from  false  running  or 
from  card  sharping  are  those  who  voluntarily  go  into  the 
business  of  betting ;  while  the  knavish  speculator  may 
hurt  to  some  degree  not  only  other  speculators,  but  also 
producers  and  consumers — the  producers  by  his  deceit, 
the  consumers  by  his  combinations  to  raise  prices.  The 
direct  harm  done  to  producers  and  consumers  by  these 
means  is  very  likely  much  less  than  is  generally  sup- 
posed ;  in  the  first  place,  because  successful  corners  are 
relatively  few,  and,  in  the  second  place,  because  the  profits 
of  one  group  of  speculators  are  for  the  most  part  made  at 
the  expense  of  other  groups.  But  the  indirect  harm  to 
business  methods  and  business  morals  is  incalculable. 

§  121.  So  great  has  been  the  extent  of  this  evil  that 
many  have  desired  to  see  an  entire  prohibition  of  con- 
tracts for  future  delivery  of  things  which  a  man  does  not 
possess  at  the  time  ;  but  this  is  obviously  out  of  the 
question.  It  would  prevent  operations  like  those  of  the 
cotton  broker  or  the  lumber  merchant,  which  economize 
the  capital  of  the  community  and  have  become  a  neces- 
sary feature  in  modern  business  life.  It  would  be  at- 
tended by  great  and  disastrous  irregularity  in  prices. 
Any  legislation  of  this  kind,  in  order  to  be  successful, 
must  be  so  contrived  as  to  affect  the  gambUng  trans- 
actions and  leave  the  legitimate  ones  comparatively 
untouched. 

§  122.  It  is  extremely  difficult  to  make  this  distinction 
by  law.  It  cannot  be  based  on  the  subject-matter  of  the 
transaction.  The  illegitimate  speculations  deal  with  the 
same  articles  as  the  legitimate  ones.  Sometimes  when 
public  indignation  has  been  roused  by  the  operation  of 


EFFECT  OF  RESTRICTIONS.  109 

brokers  in  certain  lines  there  have  been  attempts  made  to 
stop  all  transactions  in  those  lines  ;  but  they  have  usually- 
proved  disastrous.  In  the  year  1864,  the  large  issue  of 
paper  currency  had  driven  gold  out  of  circulation  and 
caused  it  to  be  bought  and  sold  as  a  commodity.  Much 
of  it  was  in  the  hands  of  speculators.  When  its  price 
rose  more  than  one  hundred  per  cent,  it  was  supposed 
by  the  public  that  a  part  of  this  increase  was  due  to  the 
operations  of  these  speculators.  All  gold  speculation  was 
therefore  prohibited  by  statute.  Under  the  excitement 
of  public  opinion  in  time  of  war  this  statute  was  enforced 
to  a  far  greater  degree  than  could  have  been  done  in 
peace.  The  effect  was  precisely  the  opposite  of  what 
had  been  anticipated.  Every  man  who  was  engaged  in 
foreign  trade  had  to  provide  security  for  being  able  to 
make  gold  payments  in  the  immediate  future,  if  called 
upon  to  do  so.  Being  prevented  from  dealing  with 
speculators,  he  now  had  to  accumulate  a  reserve  of  his 
own.  This  caused  an  increased  demand  for  gold  at  a 
time  when  it  was  unusually  difficult  to  maintain  an 
adequate  supply.  •  Under  two  weeks'  operation  of  the 
act,  the  price  of  a  hundred  gold  dollars  rose  from  about 
two  hundred  paper  dollars  to  very  nearly  three  hundred. 
So  obvious  was  its  evil  effect  that  it  was  hurriedly  re- 
pealed as  a  means  of  preventing  further  commercial  dis- 
asters. Again,  in  the  early  part  of  1866  there  was  a  rise 
in  the  price  of  gold,  which  was  attributed  by  public 
opinion  to  the  speculators.  Their  machinations  were 
defeated,  not  by  legislation,  but  by  the  issue  to  the 
market  of  a  part  of  the  gold  lying  in  the  Treasury  of  the 
United  States.  For  the  moment  the  price  of  gold  fell, 
and  people  rejoiced  that  the-  plans  of  the  speculators  had 
been  defeated.  But  a  short  time  later,  when  the  war 
between  Prussia  and  Austria  caused  a  demand  for  gold  in 
Europe,  there  were  large  exports  of  the  metal,  and  its 
price    rose  by  natural  causes.     The   United   States  was 


1 1 0  SPECULA  TION. 

obliged  to  buy  back,  at  a  decided  loss,  a  part  of  the  gold 
which  the  Treasury  had  so  unwisely  issued.  It  turned  out 
in  the  end  that  the  operations  of  the  speculators  in  an- 
ticipating the  wants  of  the  future  would  have  prevented  a 
loss  to  the  country,  and  that  the  attempt  of  the  Treasury 
to  defeat  those  operations  was  attended  with  expense 
both  to  the  government  and  to  the  mercantile  com- 
munity. 

§  123.  Nor  can  the  distinction  be  based  on  the  form  of 
the  transaction.  In  England  the  law  attempts  to  enforce 
a  requirement  of  actual  delivery.  But  in  the  majority  of 
speculative  commodities  delivery  is  made,  not  by  turning 
over  the  product  itself,  but  by  a  warehouse  receipt.  The 
physical  delivery  of  a  thousand  bales  of  cotton  every  time 
the  right  to  that  cotton  changed  hands  would  involve  an 
absurd  waste  of  power.  A  warrant  is  all  which  can  be 
delivered.  But  a  warrant  for  delivery  can  be  passed  as 
many  times  as  the  exigencies  of  the  law  require.  In- 
stances are  on  record  where  such  warrants  have  changed 
hands  fifty  times  before  reaching  the  actual  consumer. 
The  spirit  of  the  law  requiring  delivery  can  thus  be 
evaded.  It  is  almost  as  easy  to  evade  laws  which  pro- 
hibit the  settlement  of  transactions  by  the  payment  of 
margins — transactions  where  there  is  no  deliver^'  of 
goods,  but  a  payment  of  money  from  one  party  to  the 
other,  based  on  a  change  in  value  of  the  goods.  Where  it 
can  be  proved  that  this  was  the  original  intent  of  the 
transaction  it  is  easy  to  stamp  it  as  gambling ;  but  a  very 
slight  change  in  form  is  sufficient  to  enable  such  opera- 
tions to  be  continued  under  a  nominal  compliance  with 
the  letter  of  the  law  and  in  open  opposition  to  its  spirit. 

§  124.  The  difference  between  legitimate  speculation 
and  gambhng  lies  neither  in  the  subject-matter  nor  in  the 
form  of  the  transaction,  but  in  its  intent  and  purpose. 
Legitimate  speculation  involves  anticipation  of  the  needs 
of  the  market  and  a  power  to  assume  risks  in  making  con- 


LEGITIMATE  METHODS.  Ill 

tracts  to  meet  these  needs.  A  failure  to  fulfil  either  of 
these  requirements  makes  the  operation  an  undesirable 
one  for  the  public  to  tolerate.  If  a  man,  instead  of 
anticipating  the  needs  of  the  market,  attempts  to  manipu- 
late that  market  by  combinations  and  corners,  any  gain 
that  he  makes  is  usually  at  the  expense  of  the  public.  A 
stricter  enforcement  of  laws  with  regard  to  conspiracy, 
and,  what  is  more  to  the  purpose,  a  better  understanding 
by  the  business  community  of  the  distinction  between 
what  is  good  and  bad  public  policy  in  this  matter,  would 
do  a  great  deal  to  remedy  some  of  the  worst  evils  with 
which  speculation  is  attended.  Of  even  more  importance 
is  the  requirement  that  a  speculator  should  actually  take 
the  risks  which  he  pretends  to  take.  He  should  speculate 
with  his  own  capital,  and  not  with  other  people's.  If  a 
man  speculates  with  his  own  capital  the  transaction  is  apt 
to  be  a  legitimate  one  ;  if  he  speculates  with  the  capital 
of  the  community  it  is  almost  always  pure  gambling, 
whether  he  intends  it  to  be  so  or  not.  In  the  first  place,  a 
requirement  that  a  man  should  speculate  with  his  own 
capital  makes  him  more  cautious.  He  is  not  likely  to 
take  risks  unless  there  is  a  reasonable  chance  of  winning. 
Moreover,  the  man  who  has  the  capital  is  likely  to  be  a 
fairly  good  judge  of  such  risks.  If  he  has  saved  it  by  his 
own  exertions  it  shows  that  he  possesses  industry  and 
prudence.  If  he  has  inherited  it,  there  is  some  probability 
that  he  has  inherited  these  same  qualities,  and  an  even 
higher  probability  that  he  has  had  the  advantages  of  a 
commercial  education.  If  in  spite  of  these  advantages  he 
makes  mistakes  and  fails  to  provide  the  public  with  what 
it  actually  needs,  he  is  unable  to  repeat  his  experiments. 
His  bad  judgment  has  eliminated  him  from  the  ranks  of 
speculators,  while  his  successful  rival,  by  the  very  fact  of 
his  success,  is  able  to  repeat  his  operations  on  a  larger 
scale  in  the  immediate  future.  As  long  as  the  require- 
ment that  a  man  should  speculate  with  his  own  capital  is 


112  SPECULA  TION. 

rigidly  enforced,  there  is  a  progressive  elimination  of  the 
unfit  and  selection  of  the  competent.  The  longer  this 
process  goes  on  the  greater  is  the  probability  that  the 
wants  of  the  market  will  be  anticipated  and  that  the  work 
of  speculation  will  prove  one  of  equalization  :  putting  pro- 
ducts where  they  are  needed,  increasing  their  utility  to 
the  community,  and  insuring  it  against  fluctuations  in 
their  supply. 

§  125,  But  if  a  man  can  speculate  on  borrowed  capital 
and  have  the  credit  of  the  community  placed  at  his  dis- 
posal for  this  purpose,  the  result  is  likely  to  be  quite 
different.  The  chance  of  using  other  people's  money 
puts  a  premium  on  reckless  gambling  operations.  It 
allows  the  speculator  to  take  indefinite  chances  in  risking 
what  does  not  belong  to  him,  with  the  assurance  of 
increasing  his  own  power  and  influence  if  such  gambling 
is  successful  and  losing  nothing  if  it  fails.  We  expose 
ourselves  to  this  danger  by  loose  systems  of  credit,  by 
loose  bankruptcy  laws,  and  above  all,  by  loose  commercial 
ethics,  under  which  the  public  opinion  of  the  business 
community  not  only  tolerates  but  admires  success  in 
operations  of  this  kind.  Instead  of  treating  speculation 
on  borrowed  capital  as  a  fraud  on  the  community  and 
denouncing  it  as  such,  we  offer  mild  criticism  in  case  of 
failure  and  unquahfied  admiration  in  case  of  success. 
There  is  no  more  serious  danger  to  the  present  commer- 
cial system  than  that  which  arises  from  the  easy-going 
tolerance  of  abuses  like  this.  As  long  as  this  state  of 
mind  continues  no  law  to  check  the  abuses  of  speculation 
can  be  made  effective.  With  a  reform  in  public  senti- 
ment, little  or  no  law  would  be  needed. 

§  126.  It  is  not  only  in  commercial  matters,  but  also  in 
industrial  ones  that  the  speculator  exercises  a  dominant 
influence.  He  controls  production  as  well  as  trade. 
What  the  merchant  does  when  he  buys  products  in  the 
hope  of  selling  them  at  an  advanced  price,  the  manufac- 


INDUSTRIAL  RISKS.  II3 

turer  is  doing  when  he  buys  labor  in  the  hope  of  selling  the 
results  of  that  labor  at  a  profit.  The  whole  wage  system 
is  one  under  which  the  employers  of  the  country  part 
with  property  rights  to-day  in  the  hope  of  securing  larger 
property  rights  in  the  future.  Part  of  their  prosperity 
arises  from  skill  in  organizing  labor ;  part,  and  usually  a 
larger  part,  arises  from  skill  in  foreseeing  the  wants  of  the 
market.  The  success  or  failure  of  a  man  engaged  in 
manufacturing,  in  transportation,  or  in  agriculture  depends 
more  upon  his  skill  as  a  prophet  than  upon  his  industry 
as  a  producer.  When  Henry  George  says,  "  It  is  never 
as  an  employer  of  labor  that  any  producer  needs  capital. 
When  he  does  need  capital  it  is  because  he  is  not  only  an 
employer  of  labor,  but  a  merchant  or  speculator  in  or  an 
accumulator  of  the  products  of  labor,"  he  has  described  a 
salient  feature  of  the  modern  industrial  system.  But 
when  he  goes  on  to  assume  that  this  state  of  things  is  an 
unnecessary  and  arbitrary  one,  he  fails  to  take  the  facts 
of  industrial  history  into  account.  We  have  put  the  em- 
ployment of  labor  into  the  hands  of  those  who  are  able 
and  ready  to  speculate  in  the  products  of  labor,  because 
this  method  has  on  the  whole  proved  the  best  for  the 
community.  The  industrial  development  of  the  last  three 
or  four  hundred  years,  rightly  interpreted,  is  an  account 
of  the  reasons  which  have  led  society  to  put  the  control 
of  its  industry  into  the  hands  of  a  body  of  speculative 
investors. 

§  127.  All  productive  industry  involves  a  certain  amount 
of  risk.  Whenever  time  elapses  between  the  application 
of  labor  and  the  completion  of  the  product  of  labor  in  a 
form  available  for  actual  enjoyment,  there  is  an  advance 
of  capital  to  the  producers  for  the  sake  of  a  remote  and 
generally  somewhat  unknown  result.  In  the  building  of 
a  factory  or  a  railroad  a  great  deal  of  food  is  consumed. 
Whether  the  product  of  the  labor  thus  applied  will  be  as 
useful  to  the  community  as  the  food  which  was  consumed 


1 14  SPECULA  TION. 

by  those  who  have  produced  it,  is  always  somewhat  un- 
certain. The  more  remote  the  result,  the  greater  is  the 
uncertainty.  George's  own  chosen  illustration  refutes  his 
assumption  that  labor  necessarily  replaces  the  capital 
which  it  consumes.  "  Here  is  a  blacksmith  at  his  forge 
making  picks  ;  clearly  he  is  making  capital — adding  picks 
to  his  employer's  capital,  before  he  draws  money  from  it 
in  wages.  Here  is  a  machinist  or-  boiler-maker  working 
on  the  keel-plates  of  a  Great  Eastern.  Is  he  not  also  just 
as  clearly  creating  value — making  capital  ?  "  No.  The 
men  who  worked  on  the  keel-plates  of  the  Great  Eastern 
were  clearly  not  creating  value.  The  Great  Eastern  was 
an  ill-designed  boat  that  never  rendered  the  services  ex- 
pected. It  was  a  case  of  misdirected  labor.  Had  the 
machinists  and  boiler-makers  who  worked  on  the  Great 
Eastern  been  compelled  to  content  themselves  with  the 
price  which  the  result  of  their  labor  ultimately  com- 
manded, they  would  have  starved  before  it  was  half  done. 
In  the  simple  processes  like  those  of  the  blacksmith  the 
result  is  so  near  at  hand  and  the  needs  of  the  consumers 
so  well  known,  that  the  chance  of  conspicuous  failure  to 
replace  the  public  capital  consumed  is  very  small  indeed ; 
in  processes  like  those  of  steamship  or  railroad  building 
the  danger  is  indefinitely  larger.  The  more  remote  the 
consumers  in  time  or  place,  the  greater  is  the  uncertainty 
and  the  more  speculative  the  whole  transaction. 

§  128.  Especially  prominent  does  this  uncertainty  be- 
come in  the  application  of  any  new  process  or  the  de- 
velopment of  any  new  locality.  Under  old  conditions, 
experience  has  proved  what  products  are  wanted  and  how 
labor  can  be  economically  applied  ;  but  every  new  inven- 
tion or  new  settlement  involves  a  multitude  of  new  and 
unknown  conditions.  Scientific  experts  cannot  predict 
the  success  or  failure  of  a  commercial  enterprise  ;  it  re- 
quires the  test  of  actual  experience.  Every  business  man 
will  tell  you  of  many  projects  that  look  well  on  paper 


INDUSTRIAL  PROGRESS.  I15 

but  fail  to  work  in  practice.  A  large  proportion  of  the 
capital  embarked  in  such  enterprises  is  lost.  A  large  pro- 
portion of  the  food  consumed  by  the  laborers  engaged  in 
such  undertakings  is  virtually  wasted. 

§  129.  Are  we  then  to  forego  all  chance  of  such  prog- 
ress .''  No,  The  gain  to  the  community  as  a  whole,  from 
one  successful  experiment,  may  outweigh  the  loss  from 
ten  unsuccessful  ones.  The  conservative  nation  that 
never  changes  its  methods  avoids  a  great  many  losses, 
but  it  fails  to  make  the  conspicuous  gains  which  consti- 
tute modern  industrial  civilization.  The  problem  of  in- 
dustrial growth  can  be  solved  only  by  encouraging  enough 
experiments  to  secure  progress  without  encouraging  so 
many  as  to  destroy  the  whole  accumulated  capital  of  the 
community.  We  have  tried  to  accomplish  the  former 
object  by  giving  individual  possessors  of  capital  the  chance 
of  realizing  large  profits  in  case  of  success ;  and  to  protect 
ourselves  against  the  latter  danger  by  insisting,  at  least  in 
theory,  that  a  man  shall  make  these  experiments  at  his 
own  expense.  If  everybody  were  free  to  undertake  them, 
whether  he  had  proved  his  fitness  by  accumulating  private 
capital  or  not,  the  food  supply  of  the  community  would 
probably  soon  run  short.  If  nobody  were  allowed  to 
make  them  until  the  whole  community  was  ready  to  vote 
for  their  adoption,  they  would  be  indefinitely  delayed. 
By  leaving  it  to  the  option  of  the  individual  property 
holder  to  undertake  them  or  not  as  he  pleases,  society 
secures  most  of  the  gain  and  avoids  most  of  the  loss.  It 
allows  him  to  waste  part  of  the  capital  of  the  community 
in  unsuccessful  experiments,  believing  that  his  example 
will  be  a  warning  to  prevent  others  from  following  in  his 
track,  and  that  the  immediate  loss  to  the  community  may 
become  a  means  of  future  gain.  It  guarantees  him  the 
good  results  from  the  successful  experiments,  trusting 
that  competition  will  subsequently  prevent  his  profits 
from  being  too  large. 


1 1 6  SPECULA  TION. 

§  130.  Where  this  view  prevails,  a  new  motive  is  given 
for  the  acquisition  of  property.  It  is  no  longer  desired 
simply  as  a  means  of  enjoyment,  but  as  a  means  of  con- 
trolling the  industrial  actions  of  other  men.  The  pursuit 
of  wealth  beyond  a  man's  present  necessities  is  no  longer 
a  matter  of  avarice  but  of  ambition.  Such  wealth  gives 
its  owner  a  power  in  no  wise  inferior  to  that  of  the  success- 
ful general  or  politician. 

§  131.  The  introduction  of  this  new  motive  for  amassing 
wealth  produces  the  following  effects  : 

1.  A  great  increase  of  accumulations.  Under  the  stimu- 
lus of  ambition  many  men  are  led  to  increase  their  produc- 
tion and  diminish  their  consumption  far  more  than  any 
intelligent  consideration  of  their  own  comfort  would 
dictate.  In  this  way  we  have  a  great  increase  in  the 
amount  of  public  wealth  available  for  enterprises  whose 
return  is  remote  and  involves  long  waiting.  The  rights  to 
such  wealth  may  not  always  remain  in  the  hands  of  those 
who  have  done  the  most  work  or  practised  the  most  ab- 
stinence ;  but  it  remains  none  the  less  true  that  private 
motives  for  work  and  abstinence  are  the  most  effective 
means  of  accumulating  public  capital. 

2.  A  process  of  natural  selection  of  men  who  have 
ability  to  manage  capital.  If  the  property  owner  has 
shown  foresight  in  investment  he  reaps  a  rich  reward 
for  his  services  in  rendering  a  new  process  or  locality 
available  for  supplying  the  wants  of  the  community.  If 
he  has  been  over-sanguine,  he  loses  his  own  capital 
and  that  of  those  who  have  trusted  him,  and  becomes 
once  more  dependent  on  his  labor.  Under  this  system 
we  have  not  simply  a  selection  of  the  strong  and  an 
elimination  of  the  weak,  nor  a  selection  of  the  indus- 
trious and  an  elimination  of  the  lazy ;  but  a  selection  of 
the  prudent  and  intellectual  with  an  elimination  of  the 
reckless  or  emotional.  The  moral  character  of  the  em- 
ployers thus  developed  presents  a  mixture  of  good  and 


NARROWED  MARGIiY  OF  PROFIT.  WJ 

bad  qualities.  The  control  is  placed  in  the  hands  of  men 
who  are  enterprising  and  efficient,  but  often  narrow  and 
unscrupulous.  They  possess  sagacity  which  enables  them 
to  deal  with  the  market ;  they  often  fail  to  possess  that 
broader  sagacity  which  would  enable  them  to  deal  equally 
well  with  those  in  their  employ.  The  danger  of  this 
deficiency  is  greatly  intensified  by  the  possibility  of  specu- 
lating with  borrowed  capital,  and  gaining  control  of  in- 
dustrial enterprise  by  transactions  which  are  virtually 
gambling. 

3.  An  increased  intensity  of  competition  among  those 
who  handle  the  large  accumulations  of  capital.  This  is 
contrary  to  the  popular  view.  It  is  commonly  assumed 
that  the  more  competitors  you  have,  the  greater  will  be 
the  intensity  of  competition.  But  in  actual  experience 
there  is  no  competition  in  the  world  so  intense  as  that 
which  prevails  between  two  highly  organized  bodies 
that  stand  opposed  to  one  another.  In  the  old  days  of 
small  concerns  there  was  much  more  slackness  of  manage- 
ment, and  much  larger  profit  per  unit  of  product,  than 
we  find  to-day.  It  is  proverbial  that  the  largest  houses 
can  make  the  closest  calculations  in  selling  goods  at  a 
slight  margin  above  expense  ;  and  competition  is  generally 
strong  enough  to  force  them  to  make  these  calculations 
closer  than  would  have  been  deemed  possible  a  half- 
century  ago — in  other  words,  to  keep  down  profits. 

§  132.  In  comparing  our  large  factories  of  to-day  with 
the  smaller  ones  of  two  generations  past,  we  find,  on  the 
whole,  that  the  ratio  of  wage  payments  to  interest  and 
dividends  is  larger  now  than  it  was  then.  The  margin  of 
profit  has  been  narrowing  more  conspicuously  than  the 
piece-price  for  labor  has  been  diminishing.  The  large 
capital  and  its  earnings  make  a  greater  impression  on 
the  public  mind  than  did  the  numerous  small  capitals  of 
independent  producers ;  but  it  is  not  probable  that  the 
aggregate  valuation  or  remuneration  of  the  capital  of  to- 


1 1 8  SPECULA  TION. 

day  has  increased  proportionately  with  the  increase  of 
demand  for  labor.  We  are  not  warranted  in  assuming,  as 
so  many  of  the  socialists  do,  that  profits  are  growing 
enormously  and  are  to  be  regarded  as  sums  withheld 
from  labor.  They  are  in  most  cases  not  disproportionate 
to  the  chances  of  loss.  A  very  slight  change  in  efficiency 
of  management  may  readily  convert  the  capitalist's  sur- 
plus into  a  deficit.  The  charge  made  by  the  capitalist 
classes,  for  their  services  in  industrial  speculation,  cannot 
be  regarded  as  immoderate,  if  the  work  is  well  done. 

§  133.  But  how  far  is  this  condition  fulfilled?  Does 
the  existing  system  secure  progress  and  avoid  loss?  To 
the  first  half  of  this  question  we  may  unhesitatingly  give 
an  affirmative  answer.  Whatever  else  the  speculative  sys- 
tem may  do  or  fail  to  do,  it  gives  us  industrial  progress. 
It  was  for  this  reason  that  it  displaced  the  traditional 
methods  of  agriculture  and  manufactures  which  had  pre- 
ceded it.  The  feudal  system  and  the  gild  system  were 
both  too  conservative ;  the  system  of  private  capital 
proved  its  superiority  in  being  progressive.  Nor  has  this 
merit  outworn  itself  with  age.  The  superior  flexibility  of 
the  speculative  system  makes  itself  conspicuous  not  only 
in  contrast  with  feudal  industry,  but  also  with  modern 
state-owned  industry.  Though  half  the  railroads  and 
nine-tenths  of  the  telegraphs  of  the  world  are  in  govern- 
ment hands,  all  the  large  improvements  of  method  in 
these  lines  have  been  made  under  private  enterprise. 

The  work  of  avoiding  losses  has  not  been  so  well  done. 
It  is  the  theory  of  the  modern  system  that  the  accumu- 
lated capital  of  speculators  should  act  as  an  insurance  fund 
to  secure  a  steady  supply  of  products  and  an  unimpaired 
reserve  of  national  resources.  This  general  reserve  is 
fairly  well  maintained  ;  but  it  is  not  always  well  utilized. 
The  supply  of  capital  is  steadier  and  surer  than  the  em- 
ployment of  labor.  Mistakes  and  wrongs  of  large  specu- 
lators frequently  result  in  commercial  crises  from   which 


FINANCIAL  LEADERSHIP.  1 19 

the  whole  community  suffers.  The  occurrence  of  these 
crises  constitutes  the  severest  possible  indictment  against 
the  modern  speculative  methods. 

§  134.  It  will  not  do  for  capitalists  to  try  to  minimize 
this  indictment,  or  to  evade  the  responsibility  for  the  evils 
attendant  upon  industrial  depressions.  Society  gives  its 
great  financiers  a  trust  compared  with  which  all  other 
trusts  sink  into  insignificance.  It  gives  them  the  power 
of  directing  the  labor  and  capital  of  the  country.  If  they 
can  do  this  well,  they  will  deserve  the  power  and  retain 
the  trust.  But  in  order  that  it  shall  be  well  done,  the 
control  must  be  in  competent  hands. 

To  secure  this  result,  the  process  of  natural  selection  of 
employers  must  be  what  it  purports  to  be — a  survival  of 
those  who  have  proved  their  power  to  serve  the  public 
and  an  elimination  of  those  who  have  failed  to  do  so. 
The  contest  for  commercial  supremacy  must  be  settled 
by  success  in  organizing  production  and  foreseeing  con- 
surpption,  not  by  success  in  gambling.  If  the  industrial 
and  financial  struggle  actually  brings  the  best  men  for- 
ward, they  show  their  ability  in  such  a  manner  that  we 
have  little  to  fear  from  socialism.  If  a  man's  personal 
advantage  is  identified  with  the  success  of  his  business  ; 
if  his  position  in  the  financial  world  is  dependent  on  his 
competence  in  the  industrial  world ;  if,  in  short,  he  ar- 
ranges to  stand  or  fall  with  the  success  or  failure  of  his 
management,  then  we  have  a  process  of  natural  selection 
under  which  men  who  serve  the  public  inevitably  come 
to  the  front,  while  their  less  competent  rivals  are  pushed 
into  the  background.  If,  on  the  other  hand,  the  question 
of  control  is  settled  by  gambling  instead  of  by  legitimate 
business  transactions,  if  the  possession  of  financial  au- 
thority is  made  to  depend  on  success  in  stock  operations, 
rather  than  on  success  in  organizing  producers  and  meet- 
ing the  wants  of  consumers,  then  we  have  a  process  of 
selection  by  which  the  wrong  leaders  come  to  the  front 


I20  SPECULATION. 

driving  out  competitors  who  might  serve  the  public  better, 
though  they  have  not  known  how  to  serve  themselves  quite 
so  well.  When  the  wrong  men  are  brought  forward,  the 
speculative  system  is  in  real  danger,  because  it  does  not 
do  what  the  public  has  a  right  to  demand  of  it. 

§  135,  We  cannot  rely  upon  legislation  to  protect  us 
from  this  danger,  because,  as  we  have  already  seen, 
gambling  transactions  and  legitimate  transactions  are 
indistinguishable  in  form.  We  must  look  to  the  public 
sentiment  of  the  business  community  ;  we  must  see  that 
it  recognizes  the  difference  between  legitimate  and  illegiti- 
mate speculation,  and  condemns  the  latter  as  a  breach  of 
trust.  Such  it  is  under  existing  conditions.  The  man 
who  gambles  away  his  money  is  not  simply  parting  with 
his  own  enjoyment,  but  with  his  control  of  the  industrial 
forces  of  the  community.  It  is  not  like  selling  his  labor  : 
it  is  like  selling  his  vote. 

If  business  men  are  not  to  be  controlled  by  commercial 
ethics — ethics  fitting  the  economic  conditions  of  today, 
rather  than  those  of  five  centuries  ago, — they  must  expect 
to  be  controlled  by  something  else.  If  they  will  not 
accept  the  full  measure  of  responsibility  which  goes  with 
their  industrial  power,  they  must  expect  to  be  deprived 
of  responsibility  and  power  together,  by  a  popular  move- 
ment in  the  direction  of  socialism.  Such  a  movement  is 
being  aided  and  countenanced  by  every  financier  whose 
interests  in  the  stock  market  lead  him  to  forget  the  inter- 
ests of  his  properties,  by  every  lawyer  who  teaches  his 
clients  to  evade  the  responsibilities  attaching  to  wealth, 
by  every  man  who  in  the  excitement  of  speculation  loses 
sight  of  those  responsibilities — by  every  one,  in  short,  who 
forgets  that  under  the  existing  system  the  possession  of 
money  involves  a  public  trust,  with  whose  fulfilment  or 
non-fulfilment  that  system  must  stand  or  fall. 


CHAPTER  V. 

INVESTMENT  OF  CAPITAL. 

The  Wage  System — Private  Land  Ownership — Patent  Right — The 
Payment  of  Interest — Limited  Liability. 

W.  J.  Ashley  :  "  English  Economic  History."  London  and  New  York, 
1891,  1893. 

K.  Marx:  "Das  Kapital."  This  book  (which  has  been  translated  by 
S.  Moore  and  E.  Aveling),  in  the  closing  sections  of  the  firsi  volume,  gives 
the  socialistic  view  of  the  events  and  processes  described  in  this  chapter. 

§  136.  It  is  characteristic  of  the  modern  industrial  sys- 
tem that  a  laborer  who  owns  no  capital,  though  nominally- 
free  to  do  what  he  pleases,  must  actually  find  some  prop- 
erty owner  who  will  give  him  enough  to  keep  him  alive 
during  the  period  which  must  elapse  between  the  render- 
ing of  the  labor  and  the  sale  of  the  finished  product. 
Under  such  circumstances,  the  laborer  almost  inevitably 
submits  to  the  direction  of  the  property  owner  in  deciding 
how  his  labor  shall  be  applied.  Laborers  without  capital 
must  necessarily  work  on  this  basis ;  even  those  who  have 
small  amounts  of  capital  habitually  do  so.  Such  advances 
of  capital  are  known  as  wages.  Many  writers  of  good  stand- 
ing give  broader  definitions  than  this,  but  in  the  actual 
usage  of  ordinary  life  wages  designate  the  sums  paid  by 
property  owners,  or  their  representatives,  to  laborers  for 
work  done  under  the  direction  of  the  property  owners.* 

'  If  the  degree  of  education  required  is  such  that  the  laborer  must  be  in 
large  measure  self-directing,  these  payments  are  known  as  salaries  or  fees ; 
the  former  term  being  applied  to  payments  for  continuous  employment,  the 
latter  to  payments  for  irregular  or  varying  employment.  Salaries  correspond 
to  time  wages  (ch.  x.),  fees  to  piece  wages. 


122  INVESTMENT  OF  CAPITAL. 

§  137.  Whatever  be  the  details  of  the  contract  by  which 
wages  are  determined,  the  employer  must  be  in  a  position 
to  guarantee  the  fulfilment  of  his  part  of  the  agreement 
and  to  relieve  the  workman  of  any  risk  which  may  arise 
from  failure  to  sell  the  product  of  his  work  at  the  expected 
profit.  This  is  essential  to  the  idea  of  wages,  and  to  the 
principles  on  which  modern  industrial  society  is  organized. 
This  is  the  reason  why  the  employer  must  be  a  property 
owner,  or  must  at  any  rate  act  as  the  agent  or  representa- 
tive of  property  owners.  If  he  is  not  in  this  position,  he 
cannot  guarantee  the  payment  of  the  wages  he  has  agreed 
to  give.  The  certainty  that  wages  shall  be  paid  is  so  im- 
portant to  society  that  the  law  strains  every  point  to 
secure  this  end.  The  employer  should  pay  his  hands  in 
money,  or  in  checks  which  are  as  good  as  money,  not  in 
orders  upon  stores  or  other  forms  of  "  truck."  In  many 
states  he  is  compelled  to  make  his  payments  as  often  as 
once  a  week.  The  workman  not  infrequently  enjoys  a 
"  mechanic's  lien  "  upon  the  results  of  his  work ;  for 
instance,  if  a  builder  for  any  reason  cannot  pay  his  jour- 
neymen the  wages  agreed  upon,  the  journeymen  can 
attach  the  building  upon  which  they  have  been  employed, 
and  compel  its  owner  to  pay  the  wages  due  them.  On 
the  other  hand  the  wages  themselves  are  in  many  states 
exempt  from  attachment ;  that  is  to  say,  if  the  laborer 
owes  money  to  an  outside  party,  that  party  cannot  have 
recourse  to  the  employer,  and  divert  from  the  workmen 
wages  earned  but  not  yet  paid.  The  wage  contract,  in 
such  states,  must  be  fulfilled  with  the  workman  directly, 
and  not  with  the  workman's  creditor.  Wherever  society 
tolerates  any  failure  on  the  part  of  the  employer  to  meet 
such  contracts  fully  and  directly,  it  indicates  a  low  stage 
of  industrial  development.' 

'  An  exception  to  the  stringency  of  this  requirement  is  found  in  the  law 
concerning  seamen's  wages.  In  times  past  the  shipowner  has  not  generally 
been  held  liable  for  such  wages  unless  the  voyage  was  successfully  completed. 
This  was  because  marine  enterprise  was  attended  with  such  risks  from  ship- 
wreck or  piracy  that  an  effective  guarantee  was  impossible.     In  recent  years, 

r 

4t 


COST  OF  PRODUCTION.  I23 

§  138.  The  great  bulk  of  the  wage  payments  in  any  com- 
munity is  made  by  those  who  expect  to  sell  the  result  of 
the  labor  to  others  instead  of  enjoying  it  themselves.  Such 
a  payment  is  a  speculative  investment  of  capital.  Look- 
ing at  the  transaction  from  the  private  standpoint  the 
property  owner  transfers  a  certain  amount  of  money  to 
the  laborer,  in  the  hope  of  obtaining  a  larger  amount  of 
money  in  the  future  by  the  sale  of  the  product  of  that 
labor.  Looking  at  the  transaction  from  the  public  stand- 
point, the  laborer  is  enabled  to  consume  a  certain  part  of 
the  public  wealth,  in  the  expectation  that  the  products  of 
his  labor  will  more  than  replace  the  amount  thus  con- 
sumed. He  receives  as  income  the  right  to  enjoy  a  part 
of  the  capital  already  existing'  ;  his  employer  hopes  and 
believes  that  any  destruction  of  public  capital  will  be 
made  good,  and  is  prepared  to  bear  the  loss,  in  his  own 
property,  in  case  this  expectation  is  not  fulfilled. 

§  139.  The  amount  of  capital  thus  sacrificed  in  the 
hope  of  its  replacement  and  increase  is  known  as  cost  of 
production.  In  its  private  sense,  the  cost  of  an  article  to 
any  individual  speculator  is  the  amount  of  capital  which 
he  has  advanced  to  secure  it.  This  may  have  been  paid 
either  to  the  laborers  in  the  form  of  wages,  or  to  other 
speculators  as  a  means  of  controlling  the  results  of  past 
labor.  Private  cost  is  better  designated  as  expense.*  In 
its  public  sense  the  cost  of  an  article  to  the  community  is 

as  the  industry  has  developed  and  become  more  secure  by  better  navigation 
and  by  the  development  of  marine  insurance,  there  has  been  an  increasing 
tendency  to  treat  seamen's  wages  just  like  other  wages  ;  that  is,  to  guarantee 
their  payment  even  in  the  event  of  shipwreck. 

'  The  money  which  he  receives  is  known  as  nominal  wages  ;  the  enjoy- 
ment which  he  can  command  is  called  real  wages.     (See  ch.  x.) 

*  Some  writers  prefer  to  measure  cost  in  terms  of  pain  (total  and  margi- 
nal "disutility")  rather  than  in  terms  of  waste.  The  practical  difference 
resulting  from  the  use  of  the  two  methods  is  not  very  great,  for  an  increase 
or  diminution  of  pain  is  usually  accompanied  by  a  corresponding  increase  or 
diminution  in  waste  ;  but  waste  is  a  better  standard,  because  it  is  a  more 
measurable  thing  than  pain,  and  because  the  reduction  of  waste  furnishes  a 
more  tangible  goal  of  public  policy  than  the  reduction  of  pain. 


124  INVESTMENT  OF  CAPITAL. 

the  amount  of  public  capital  which  has  been  consumed 
or  rendered  unavailable  in  connection  with  the  production 
of  that  article. 

The  excess  of  return  above  cost  is  known  as  profit. 
The  profit  of  an  individual  is  the  difference  between 
money  advanced  in  production  and  money  received  from 
the  sale  of  the  product.  The  profit  of  a  community  is 
the  difference  between  old  products  consumed  and  new 
ones  produced.  Individual  profit  is  tolerably  easy  to 
measure ;  the  profit  of  a  community,  extremely  diffi- 
cult.' 

Under  the  modern  wage  system  society  gives  the  em- 
ployer the  right  to  realize  individual  profit  from  the  sale 
of  the  products  of  labor  in  the  belief  that  his  effort  to  do 
this  will  conduce  to  public  profit. 

§  140.  Profits  are  neither  more  nor  less  than  the  excess 
of  the  selling  price  of  the  products  of  industry  above  the 
amount  advanced  as  wages.  It  is  true  that  some  of  the 
investments  of  an  individual  capitalist  are  not  made  in 
the  form  of  wages,  but  in  payments  for  materials  and 
machinery  which  other  capitalists  have  made  ready  for 
use.  But  if  we  look  at  the  relation  between  capitalists 
as  a  class  and  laborers  as  a  class,  we  shall  find  that  the 
capitalists  as  a  body  advance  wages,  and  appropriate  the 
difference  between  the  price  paid  to  the  laborers  and  that 
received  from  the  consumers.  The  expectation  of  this 
difference  or  profit  gives  them  a  motive  to  utilize  their 
capital,  and  to  make  it  more  available  as  a  means  of 
public  income. 

'  While  the  effort  of  the  speculator  to  reduce  his  expense  and  increase 
his  profit  tends  on  the  whole  to  reduce  public  cost  and  increase  public  profit, 
it  must  not  be  assumed  that  expense  corresponds  at  all  accurately  to  cost,  or 
private  profit  to  public  profit  ;  any  more  than  the  selling  prices  of  articles 
correspond  to  their  total  utility.  The  producer's  surplus  described  in  chap- 
ter ix.  represents  in  large  measure  an  excess  of  expense  above  cost ;  an 
amount  transferred  from  the  capitalists  to  the  laborers  in  excess  of  the 
necessary  consumption  of  the  latter. 


FIXED    CAPITAL.  12$ 

If  the  process  of  production  is  a  brief  one,  this  motive 
is  enough  to  make  people  invest  their  capital.  If  a  man 
has  more  property  than  he  needs  for  immediate  use,  he 
is  glad  to  apply  it  in  such  a  way  as  to  give  him  control 
of  the  labor  of  others.  If  the  chance  of  gain  is  greater 
than  the  chance  of  loss  most  men  would  rather  invest 
their  capital  than  store  it  up.  There  is  good  ground  for 
such  expectation  of  gain  from  investment  of  capital  when 
an  intelligent  man  takes  control  of  a  process  whose  dura- 
tion is  short.  Any  skill  that  he  may  show  redounds  to 
his  own  advantage.  But  in  a  long  process  of  production 
the  case  is  different.  The  instant  it  has  proved  a  success, 
other  competitors  come  into  the  field  and  reduce  profits 
by  their  competition.  The  pioneer  in  any  industrial 
method  which  involves  remote  returns,  takes  all  the 
chances  of  failure,  and  may  receive  but  a  small  part  of 
the  rewards  of  success.  Naturally  there  is  great  reluc- 
tance to  take  the  initiative  on  terms  like  this.  It  is  not 
enough  to  give  the  speculator  direction  of  his  labor  and 
the  right  to  dispose  of  his  products,  in  order  to  induce 
him  to  invest  his  capital  for  such  remote  objects.  He 
must  receive  a  guarantee  of  permanent  profit  in  case  of 
success,  sufficient  to  make  him  hazard  the  risk  of  perma- 
nent loss  in  case  of  failure. 

§  141.  Capital  thus  invested  for  the  sake  of  a  remote 
return,  whether  in  the  form  of  agricultural  improvements, 
buildings,  or  machinery',  is  said  to  he  fixed.  It  can  rarely 
be  withdrawn  from  its  original  use  and  applied  in  any 
other  place  or  for  any  other  purpose,  without  great  loss 
to  the  owner  and  to  the  public.  But  in  spite  of  this 
danger  of  loss  the  economy  to  the_  public,  attendant  upon 
the  use  of  fixed  capital,  is  very  great,  and  constantly  in- 
creases as  population  becomes  denser. 

The  first  farms  cultivated  are  not  as  a  rule  the  best 
ones,  but  those  which  require  the  least  original  outlay. 
The  first  industries  practised  are  those  which  require  the 


126  INVESTMENT  OF  CAPITAL. 

fewest  tools.  The  first  roads  are  made  with  the  least 
possible  amount  of  surfacing  and  drainage.  The  mini- 
mum of  fixed  capital  is  used  in  every  instance  because  of 
the  small  market  and  the  need  of  immediate  returns. 
But  as  the  community  grows  it  adopts  a  different  system. 
It  resorts  to  farms  which  are  less  accessible,  and  to 
methods  of  cultivation  which  are  less  obvious,  but  which, 
when  once  brought  into  use,  are  more  productive.  It 
applies  processes  of  manufacture  whose  dominant  prin- 
ciple is  not  to  reduce  the  outlay,  but  to  increase  the  out- 
put. It  adopts  means  of  transportation  which  cost  much 
more  to  establish,  but  much  less  to  use.  The  permanent 
investment  of  fixed  capital  keeps  growing  larger ;  the 
current  expenses  per  unit  of  product  grow  correspond- 
ingly smaller. 

The  original  outlay  connected  with  an  old-fashioned 
shoemaker's  establishment  was  very  small.  A  few 
benches  and  tools  were  suflficient  means  for  conducting 
the  business.  But  the  labor  of  sewing  each  pair  of  shoes 
was  very  large.  When  hand  work  gave  place  to  factory 
work,  it  necessitated  an  original  investment  of  many 
thousands  of  dollars ;  but  when  a  factory  was  once  estab- 
lished, the  direct  expense  of  making  each  pair  of  shoes 
was  very  small.  The  larger  the  market  for  shoes,  the 
greater  was  the  comparative  economy  of  factory  labor. 
The  cost  of  an  old-fashioned  country  road  is  next  to 
nothing;  the  cost  of  carriage  upon  such  a  road  may 
amount  to  a  dollar  a  ton  a  mile.  Substitute  a  modern 
macadamized  road,  and  you  increase  the  original  cost, 
but  diminish  the  cost  of  carriage.  Spend  $30,000  a  mile 
on  a  railroad,  and  the  direct  cost  of  carrying  freight  will  be 
less  than  a  cent  for  each  ton  carried.  Increase  the  in- 
vestment in  the  railroad  by  reducing  grades  and  making 
more  solid  structures,  and  you  will  treble  the  possible 
train  loads,  with  a  corresponding  diminution  in  cost  per 
ton. 


MODERN  LAND    TENURE.  12/ 

To  realize  this  economy  a  large  market  is  necessary. 
If  there  are  only  a  hundred  people  to  wear  the  shoes  or 
to  use  the  road,  old-fashioned  methods  are  more  eco- 
nomical than  modern  ones.  But  with  increase  of  popula- 
tion we  find  the  opportunity  for  increasing  use  of  fixed 
capital  and  the  necessity  for  such  economic  institutions 
as  shall  encourage  its  investment. 

§  142.  The  first  and  in  some  respects  the  most  im- 
portant of  these  institutions  was  private  property  in  land. 

The  feudal  land  tenure,  whose  development  was  de- 
scribed in  chapter  ii.,  was  based  upon  force.  The 
dependants  of  the  mediaeval  lord  paid  him  rent,  either  in 
labor  or  in  money,  as  a  price  for  the  security  of  posses- 
sion which  he  could  give  them.  These  feudal  burdens 
were  far  more  analogous  to  modern  taxes  than  to  modern 
ground-rents.  They  represent  a  price  paid  to  the  sover- 
eign for  his  protection,  rather  than  an  economic  equiva- 
lent paid  to  the  property  owner  for  the  productive 
capability  of  the  land.  But  when  this  security  was  once 
so  thoroughly  established  that  the  strong  arm  of  a  mili- 
tary chieftain  was  no  longer  needed  to  protect  his  vassals, 
tenure  of  land  gradually  passed  out  of  the  hands  of  sol- 
diers and  into  the  hands  of  capitalists.  It  was  found 
more  profitable  by  the  tenant  to  cultivate  improved  land 
which  produced  a  great  deal,  and  pay  a  substantial  rent 
for  it,  than  to  get  a  bare  living  from  unimproved  and 
unproductive  land,  even  though  the  rental  of  such  land 
was  merely  nominal.  This  change  was  not  only  better 
for  the  tenant  but  better  for  the  community.  If  a  new 
system  of  cultivation  enabled  more  food  to  be  raised 
from  a  given  area  with  the  same  amount  of  labor,  it  was 
of  great  advantage  to  the  community  to  have  that  system 
adopted.  When  processes  of  agriculture  were  discovered 
which  promised  an  increased  permanent  productiveness 
of  the  land,  it  became  necessary  to  guarantee  to  men  who 
had  the  capital  for  applying  these  processes  a  sufficiently 


128  INVESTMENT  OF  CAPITAL. 

long  and  complete  tenure  to  give  them  the  motive  to 
make  the  experiment.  No  one  would  be  willing  to  incur 
the  outlay  involved  in  draining  or  in  artificial  fertilizing 
unless  he  was  guaranteed  the  occupancy  of  the  land  thus 
improved  for  a  sufificiently  long  time  to  make  the  change 
remunerative  to  him,  as  well  as  to  the  community  in 
general.  For  no  new  process  is  an  assured  success 
until  it  has  been  actually  tried.  Successful  investment 
of  capital  in  the  improvement  of  real  estate  has  been  a 
means  of  making  large  fortunes ;  but  these  fortunes  were 
not  certainties  from  the  outset.  If  they  had  been,  the 
community  could  and  would  have  made  the  improve- 
ments from  the  public  funds  at  public  expense.  The 
profits  of  the  successful,  in  land  speculation  and  land  im- 
provement, have  been  offset  by  the  losses  of  the  unsuc- 
cessful. The  monopoly  of  an  advantageous  location  or 
of  a  fertile  piece  of  ground  which  the  real-estate  owner 
enjoys  is  a  premium  which  has  been  offered  to  him  be- 
cause of  the  skill  of  capitalists  in  developing  land  at  the 
points  and  in  the  ways  where  such  development  was 
needed. 

In  view  of  the  public  necessity  for  improvement  of  real 
estate  the  laws  which  prohibited  the  alienation  of  land 
from  the  families  of  the  nobles  were  gradually  modified ; 
and  the  farms  passed  from  the  hands  of  soldiers  who 
only  knew  how  to  spend  money  into  the  hands  of  prop- 
erty owners  who  understood  how  to  invest  it. 

§  143.  .This  change  in  the  system  of  tenure  was  by  no 
means  confined  to  agricultural  lands.  The  same  course 
of  development  is  seen  in  mining.  Mining  law  has  its 
hunting  stage,  where  a  man  wanders  up  and  down  the  bed 
of  a  creek  in  the  hope  of  finding  nuggets  of  gold.  It  has 
its  pastoral  stage,  where  the  miner  has  his  movable  prop- 
erty, perhaps  a  mule  and  a  wheelbarrow,  and  uses  them  as 
best  he  can  in  collecting  natural  deposits.  In  this  state  of 
society  rights  to  the  instruments  of  production  are  clearly 


MINING  CLAIMS.  129 

recognized,  and  the  stealing  of  a  mule  is  punished  with 
the  utmost  severity.  But  rights  to  real  estate  are  as  yet 
chaotic.  A  man  must  be  prepared  to  defend  them  by  his 
own  arm.  The  wanderer  has  a  claim  to  the  bed  of  a  stream 
only  as  long  as  he  is  actually  in  possession  and  can  main- 
tain his  right  for  himself.  But  as  population  becomes 
more  dense  and  these  superficial  sources  of  supply  are 
exhausted,  a  new  system  of  mining  property  becomes 
recognized  in  usage  and  in  law,  whereby  the  man  who 
invests  capital  in  a  location  obtains  permanent  rights  to 
this  location.  Whether  he  makes  his  arrangements  for 
washing  down  large  alluvial  deposits  far  away  from  an 
existing  stream,  or  for  tunnelling  into  the  quartz  rock  for 
the  sake  of  the  veins  of  metal  which  it  contains,  the  real 
estate  which  he  has  developed  becomes  his  own.  This 
permanent  right  of  property,  with  the  attendant  monop- 
oly which  it  gives,  is  an  absolute  necessity  if  the  com- 
munity wishes  a  man  to  invest  large  capital  in  mining; 
for  the  whole  investment  may  prove  a  failure,  and  no  man 
is  willing  to  take  the  chance  of  failure  unless  assured  of 
special  and  permanent  advantages  in  case  of  success. 
If  the  community  has  reached  a  point  where  it  needs  to 
have  much  capital  used  in  mining,  it  must  give  the  capi- 
talist rights  of  control  and  chances  of  possible  gain,  to  off- 
set the  great  chances  of  total  loss. 

§  144.  The  conditions  under  which  private  ownership 
of  land  has  developed  are  strikingly  illustrated  by  a  com- 
paratively new  form  of  landed  property, — submarine  rights 
to  oyster-beds.  Of  all  waters  in  the  United  States,  those 
of  the  Chesapeake  are  perhaps  best  fitted  for  the  produc- 
tion of  oysters.  But  the  system  of  tenure  recognized  by 
the  state  of  Maryland  was  not  well  adapted  to  their 
development.  Certain  ill-defined  parts  of  the  Chesapeake 
and  other  oyster  grounds  were  set  apart  for  dredging,  cer- 
tain other  parts  for  "  tonging."  There  was  also  a  right  given 
to  individuals  to  take  up  five  acres  of  oyster  land  under 


I30  INVESTMENT  OF  CAPITAL. 

water.  But  this  right  or  license  was  revocable  at  the  pleas- 
ure of  the  state,  so  that  the  licensee  had  not  the  assur- 
ance of  permanent  holding  which  would  make  far-sighted 
policy  in  the  use  of  these  oyster-beds  profitable  or  even  safe. 
The  oyster  law  of  Maryland  was  almost  exactly  analogous 
to  the  land  law  of  the  mediaeval  village  community,  with 
its  ill-defined  common,  its  ill-defined  forest  land,  and  its 
extremely  precarious  rights  of  use  of  individual  strips  of 
the  soil.  The  result  was  the  same  in  either  case.  Proper 
utilization  of  the  land  was  impossible.  The  Maryland 
oyster-beds  were  so  rapidly  exhausted  as  to  threaten  the 
extinction  of  the  industry  in  spite  of  all  natural  advan- 
tages for  its  prosecution.  Meanwhile  there  was  a  great 
increase  in  the  production  of  oysters  in  the  waters  con- 
trolled by  some  other  states,  where  rights  of  permanent 
tenure  were  allowed  that  were  closely  analogous  to  ordi- 
nary property  in  land.  The  oyster-beds  thus  held  formed 
a  large  source  of  income  to  their  owners,  but  it  was  not 
an  income  amassed  at  the  expense  of  the  state.  The 
oyster  growers  of  Long  Island  Sound  have  paid  in  taxes 
an  amount  far  exceeding  the  total  rental  value  of  the 
oyster-beds  which  the  state  of  Maryland  leased  for  short 
terms  under  licenses  revocable  at  will. 

§  145.  The  good  effects  of  the  system  of  private  land 
tenure  are  most  conspicuously  seen  when  the  owner  and 
the  occupier  of  the  land  are  one  and  the  same  person. 
Under  these  conditions,  land  ownership  serves  at  once  as 
a  motive  to  zeal  in  labor  and  to  liberality  in  investment. 
Where  one  man  owns  the  land  and  another  occupies  it, 
the  right  of  the  owner  to  the  benefit  of  all  improvements 
not  infrequently  acts  as  a  discouragement  to  the  occupier 
and  prevents  him  from  laboring  with  the  zeal  or  the  skill 
which  he  would  otherwise  use.  The  loss  in  efficiency  of 
labor  under  such  circumstances  may  be  greater  than  the 
public  gain  from  the  capital  invested.  Large  tenant 
farms  are  sometimes  less  well  developed  than  the  peasant 


ABSENTEE   OWNERSHIP.  I31 

properties  on  the  continent  of  Europe, — in  spite  of  the 
disadvantages,  inseparable  from  small  husbandry  and  scant 
capital,  under  which  the  latter  suffer.  Systems  which 
recognize  the  right  of  the  tenant  to  compensation-  for 
improvements,  or  which  guarantee  him  fixity  of  tenure  at 
a  stated  rent,  have  often  proved  salutary.  They  help  the 
public  by  encouraging  the  tenant  more  than  they  hurt  it  by 
discouraging  the  owner — unless  the  owner  was  far-sighted 
enough  to  give  the  tenant  these  privileges  without  com- 
pulsion. Even  so  crude  a  device  as  the  metayer  system 
(§  40)  often  works  better,  on  account  of  the  permanence 
of  tenure  which  it  gives  the  occupier,  than  a  system  of 
tenancy  at  will  under  a  capitalist  landlord. 

If  for  any  reason  the  landlords  do  not  properly  develop 
the  real  estate  which  they  own,  and  try  to  get  money 
out  of  the  land  without  putting  money  into  it,  the 
system  of  private  ownership  proves  itself  a  thoroughly 
bad  one.  The  land  tenure  of  a  body  of  foreign  conquer- 
ors represents  a  drain  on  the  community  rather  than  an 
addition  to  its  resources.  The  case  of  Ireland  is  an 
instance  in  point.  The  right  to  receive  rent  from  Irish 
land  has  habitually  served,  not  as  a  motive  to  improve  the 
land,  but  as  a  means  to  degrade  the  laborer.  When  this 
result  takes  place  to  a  marked  degree,  modern  society 
often  so  far  modifies  the  principle  of  private  property  in 
land  as  to  introduce^WzW^/ rents  instead  of  competitive 
ones ;  substituting  public  arbitration  between  landlord 
and  tenant  for  a  system  of  competition  which  is  so  short- 
sighted or  imperfect  as  not  to  subserve  the  public  needs.* 

§  146.  When   the   habit  of  land   speculation   becomes 

'  Another  conspicuous  case  where  private  land  ownership  fails  to  serve 
the  public  interests  is  connected  with  the  destruction  of  forests.  In  this 
case  the  governments  have  tried  to  remedy  the  evil  by  encouraging  the  right 
use  of  the  land  rather  than  by  prohibiting  its  wrong  use.  The  point  in- 
volved in  public  or  quasi-public  forestry  is  treated  in  the  chapter  on  co- 
operation. 


132  INVESTMENT  OF  CAPITAL. 

prevalent,  there  is  always  danger  that  the  system  of  pri- 
vate land  ownership  will  be  made  a  means  of  hurting  the 
public  instead  of  helping  it. 

It  will  not  do  to  go  to  the  extreme  of  condemning  all 
land  speculation  as  hurtful.  A  man  who  sees  that  a  large 
business  block  will  be  wanted  in  a  certain  spot  at  the  end 
of  ten  years  may  serve  the  public  by  keeping  the  lot  un- 
occupied during  that  time.  For  the  gain  which  the  owner 
and  the  public  would  reap  from  the  use  of  inferior  build- 
ings during  those  ten  years  would  not  compensate  the  loss 
which  would  be  involved  in  tearing  them  down  before 
they  had  paid  for  themselves,  or  in  waiting  until  they  had 
paid  for  themselves  before  erecting  the  new  block.  In 
such  a  case  a  land  speculator  will  contribute  to  the  best 
utilization  of  the  public  wealth  by  a  far-sighted  calcula- 
tion of  the  time  when  investments  of  capital  will  be  most 
profitable.  But  it  is  needless  to  add  that  a  great  deal  of 
land  speculation  is  of  a  totally  different  character  from 
this,  and  is  a  mere  effort  to  get  money  out  of  the  land 
without  putting  money  into  it.  Such  irresponsible  specu- 
lation is  greatly  increased  by  the  mistaken  practice  of 
assessors  in  rating  unimproved  land  at  relatively  low 
figures  on  account  of  its  lack  of  productivity  and  conse- 
quent inability  to  bear  high  taxes.  No  man  should  be 
encouraged  to  keep  land  out  of  use  by  a  remission  of 
burdens  which  necessarily  puts  heavier  taxes  on  those  who 
have  put  adjoining  land  into  use.  He  is  holding  his 
property  in  a  shape  where  it  does  the  public  no  present 
good  in  the  hope  that  the  work  done  by  others  will  make 
this  a  profitable  policy  in  the  long  run.  He  may  be  right ; 
but  for  the  present  he  is  causing  public  inconvenience, 
and  cannot  complain  if  he  is  taxed  on  the  basis  of  his  own 
estimate  of  the  value  of  the  land  rather  than  on  that  of  its 
immediate  productiveness.  If  he  cannot  pay  taxes  he 
can  sell  it  to  some  one  else.  Great  as  are  the  mistakes  of 
the  single-tax  agitators  it  is  to  be  hoped  that  they  may 


PATENTS.  133 

have  a  salutary  effect  in  leading  assessors  to  put  heavier 
burdens  on  ground  values  and  lighter  ones  on  improve- 
ments. For  after  all  that  can  be  said  in  behalf  of  land 
speculation,  it  remains  practically  true  that  the  men  who 
have  done  conspicuous  public  service  with  their  land  are 
as  a  class  those  who  have  been  prompt  rather  than  tardy 
in  its  development, 

§  147.  While  agriculture  was  helped  by  giving  the  capi- 
talists ownership  of  the  land,  the  development  of  manufac- 
tures was  stimulated  by  grants  of  monopoly.  At  first 
these  grants  were  made  quite  recklessly.  In  the  early  his- 
tory of  England  we  find  frequent  records  of  permanent 
privileges  assured  to  an  individual  citizen  in  consideration 
of  his  services  in  introducing  some  new  industry.  Such 
a  system  afforded  grave  opportunities  for  abuse.  Privi- 
leges were  often  granted  to  court  favorites  as  a  reward  of 
personal  or  political  services.  The  introduction  of  a  new 
manufacture  was  made  a  pretext  for  oppressive  taxation 
of  the  people  who  had  to  use  its  products.  Special  grants 
of  this  kind,  however  plausibly  worded,  were  generally 
unpopular,  and  formed  a  frequent  source  of  public  com- 
plaint against  the  sovereigns  of  mediaeval  Europe. 

§  148.  In  modern  times  the  grant  of  monopoly  privi- 
leges is  hedged  about  with  precautions  against  such  abuse. 
The  system  of  patents  confers  a  monopoly  on  the  man 
who  introduces  a  new  invention.  But  the  government 
takes  pains  to  insist  that  such  an  invention  shall  be  really 
new,  and  the  monopoly  granted  is  only  a  temporary  one. 
A  patent  system,  if  properly  guarded,  seems  to  be  thor- 
oughly justified  by  its  results.  In  the  absence  of  such 
protection  few  new  inventions  would  be  developed.  The 
risk  attending  the  introduction  of  a  new  process  is  always 
great.  Even  when  it  works  thoroughly  well  in  the  labora- 
tary  or  model  room,  it  may  not  work  well  in  public.  The 
man  who  first  develops  a  new  invention  loses  his  whole 
capital  if  it  fails.     If  he  is  immediately  exposed  to  free 


134  INVESTMENT  OF  CAPITAL. 

competition  in  case  of  success,  he  can  enjoy  exceptional 
profits  for  a  short  time  only.  The  risk  of  loss,  under  such 
circumstances,  outweighs  the  possibility  of  gain.  No  man, 
as  has  already  been  said,  will  take  the  lead  in  a  hazardous 
experiment  when  those  who  follow  him  have  practically 
equal  chance  of  gain  and  almost  no  chance  of  loss.  The 
patent,  by  making  the  gain  a  permanent  one,  makes  it  safe 
for  a  capitalist  to  develop  a  new  process.  This  is  the  real 
justification  of  the  system.  The  American  theory  that  the 
patent  is  a  reward  for  invention,  and  the  English  theory 
that  it  is  a  reward  for  disclosure  of  the  invention  to  the 
public,  both  fail  to  touch  the  true  grounds  on  which 
patent  right  has  grown  up.  It  has  established  itself,  not 
primarily  as  a  stimulus  for  invention  or  for  disclosure,  but 
for  utilization  and  development  of  new  methods  requiring 
the  investment  of  capital  and  the  guarantees  which  shall 
make  such  investment  possible. 

The  monopoly  of  the  patentee  is  in  one  respect  much 
more  complete  than  that  of  the  landowner.  The  ex- 
clusive right  to  use  a  certain  process  may  shut  out  all 
competition ;  while  the  exclusive  right  to  use  a  certain 
piece  of  land  rarely  prevents  other  landowners  from  com- 
peting with  the  most  favored  individual.  It  puts  them  at 
a  slight  disadvantage,  but  not  often  at  a  prohibitory  one. 
The  monopoly  conferred  by  a  valuable  patent  while  it 
lasts  is  thus  much  more  absolute.  To  offset  this,  it  is 
limited  in  duration.  After  a  comparatively  short  term  of 
years  the  patent  expires,  leaving  its  owner  no  advantage 
except  what  he  has  derived  from  possessing  an  established 
business;  while  the  land  monopoly  may  continue  to  give 
an  increasing  advantage  for  an  indefinite  length  of  time. 

§  149.  The  monopoly  conferred  by  copyright  is  closely 
analogous,  both  in  its  form  and  in  its  justification,  to  that 
of  patent  right.  It  is  of  comparatively  little  importance 
for  the  community  to  decide  whether  an  idea  is  or  is  not 
a  fit  subject  of  property ;  but  it  is  of  great  importance  to 


TARIFFS  AND    SUBSIDIES.  1 35 

have  the  law  in  such  a  shape  that  a  publisher  can  safely 
risk  his  capital  in  making  that  idea  accessible  to  the  read- 
ing public.  A  new  book  may  prove  a  failure,  just  as 
much  as  a  new  process.  For  the  sake  of  profits  possible 
under  a  copyright  law,  the  publisher  can  afford  to  take 
the  risks  of  failure  which  he  cannot  do  in  the  absence  of 
such  protection. 

§  150.  Another  form  of  monopoly,  less  complete  than 
those  just  described,  is  exemplified  by  protective  tariffs 
and  navigation  acts.  The  benefit  of  such  monopoly  is 
not  given  to  one  individual  to  the  exclusion  of  other 
individuals,  but  to  the  home  producers  to  the  exclusion  of 
foreign  competitors.  The  underlying  motive  for  such 
protective  legislation,  when  framed  with  a  public  purpose 
in  view,  has  been  like  that  of  private  land  ownership  or 
patent  right ;  to  give  the  home  country  the  benefits 
accruing  from  investment  of  capital  under  its  own  imme- 
diate control.  The  case  of  a  protective  tariff  differs  from 
that  of  a  patent  in  that  the  private  risks  in  case  of  failure 
and  the  public  gains  in  case  of  success  attendant  upon 
the  tratisplantation  oi  a  process  which  is  already  in  use 
elsewhere  are  far  less  than  those  which  attend  the  develop- 
ment of  one  which  has  been  as  yet  totally  untried.' 

§  151.  Where  for  any  reason  grants  of  monopoly  have 
been  impossible,  or  inadequate  to  secure  their  purpose, 
governments  have  often  resorted  to  subsidies ;  as  in 
bounties  for  the  production  of  sugar,  municipal  subscrip- 
tion to  railroad  securities,  or,  most  frequent  of  all,  pay- 
ments   to    shipbuilders  and   shipowners.'      How  far  such 

*  The  arguments  concerning  the  protective  tariff  system  are  so  compli- 
cated and  depend  so  much  upon  the  theory  of  wages  that  their  discussion 
must  be  reserved  for  a  later  chapter. 

*  Exemption  from  taxes,  such  as  is  frequently  granted  by  our  western  cities 
for  the  purpose  of  attracting  manufacturing  capital,  is  to  all  intents  and  pur- 
poses a  subsidy.  The  same  thing  of  course  can  be  said  of  the  grants  of 
public  lands  which  have  been  used  by  the  United  States  to  encourge  trans- 
portation enterprises.     From  a  very  early  period  we  have  had  important 


136  INVESTMENT  OF  CAPITAL. 

subsidies  are  justified  is  a  question  which  must  be  reserved 
for  further  discussion  in  connection  with  matters  of  inter- 
national policy. 

§  152.  A  more  important  means  of  encouraging  the  in- 
vestment of  capital  was  the  modern  system  of  interest. 

When  debts  were  chiefly  created  for  the  sake  of  per- 
sonal expenditure,  the  taking  of  interest  or  usury  was 
deservedly  condemned.  The  men  who  borrowed  money 
and  spent  it  did  not,  as  a  rule,  increase  their  productive 
capacity.  They  relieved  a  present  need  ;  but  they  gener- 
ally did  nothing  but  put  off  a  day  of  reckoning  and  make 
it  heavier  when  it  actually  did  come.  In  cases  like  this, 
it  was  fair  enough  to  say  that  money  did  not  produce 
money  and  to  condemn  interest  on  this  ground.  Mediae- 
val loans  were  generally  unproductive  loans.  The  lender 
did  no  service  to  society  which  would  entitle  him  to  claim 
encouragement.  So  far  as  the  prohibition  of  interest 
prevented  borrowing  for  personal  expenditure,  it  was  a 
good  thing. 

But  when  a  considerable  part  of  the  loans  were  made 
for  productive  purposes,  the  case  was  altered  ;  and  it  was 
not  long  before  the  law  and  public  sentiment  were  altered 
correspondingly.  We  have  not  space  to  follow  out  in 
detail  the  various  subtleties  by  which  this  change  was  justi- 
fied to  the  legal  mind.'  The  traditional  excuse  for  interest, 
as  a  penalty  for  delay  in  payment,"  was  made  to  cover 

gifts  to  encourage  the  building  of  roads  and  canals.  In  the  years  from  1850 
to  1856  more  than  25,0CX),0C)0  acres  of  land  in  various  states  were  given  to 
railroads.  During  the  war  and  the  period  immediately  following  it  terri- 
torial lands  were  given  away  on  a  yet  larger  scale,  the  grants  in  aid  of  Pacific 
roads  alone  amounting  to  over  150,000,000  acres.  The  result  of  these  gifts 
has  been  far  from  proving  an  unmixed  good.  They  stimulated  unsound 
railroad  schemes  and  caused  railroad  building  to  be  misdirected.  Provisions 
intended  to  protect  the  interests  of  the  government  were  disregarded.  Set- 
tlers were  induced  to  move  too  far  west,  to  points  where  they  were  at  the 
mercy  of  railroad  agents.  In  many  instances  the  only  gainers  were  land 
speculators  and  financiers  of  the  worst  sort. 

*  See  Ashley,  "English  Economic  History,"  chs.  iii.  and  vi. 

•  Hence  the  derivation  of  the  word  interest — a  diflference  made  by  time. 


HISTORIC  FORMS  OF  INTEREST.  1 37 

cases  where  the  delay  was  purely  nominal.  The  theory 
of  compensation  for  loss  {damnum  emergens)  was  stretched 
to  cover  cases  where  the  only  loss  was  loss  of  oppor- 
tunity for  profit  {lucrum  cessans).  Of  yet  wider  import- 
ance was  the  recognition  of  the  right  of  one  associate  in 
an  enterprise  to  insure  a  fixed  return  to  another  instead 
of  a  variable  one.  This  contract  of  assurance  {contractus 
triniis)  really  stands  at  the  foundation  of  the  modern 
interest  system.  The  lender  of  capital  is  an  investor  who 
commutes  his  chance  of  a  large  profit  for  the  assurance 
of  a  smaller  one.  Society  allows  this  commutation,  be- 
cause it  is  a  public  advantage  to  have  the  capital  of  these 
investors  used  in  enterprises  which  they  cannot  them- 
selves supervise,  and  whose  rislcs  they  must  therefore 
leave  to  others.  The  justice  of  interest  is  not  based 
primarily  on  equities  between  borrower  and  lender,  but 
on  the  public  advantage  of  encouraging  guaranteed  in- 
vestments.' 

§  153.  The  use  of  capital  as  a  means  of  ensuring  its 
owners  a  fixed  return  derived  additional  recognition  and 
sanction  from  another  quarter  as  the  purchase  of  rent 
charges  became  more  frequent.  Whenever  a  piece  of 
property  was  economically  productive,  its  selling  price 
was   pretty  sure   to   bear  a  fixed  relation  to  its  rental. 

^  Most  of  the  popular  justifications  of  interest  try  to  reach  their  end  by 
too  short  a  route.  Bastiat  uses  the  illustration  of  a  man  who  has  made  a 
plane  which  so  increases  the  efficiency  of  labor  that  some  one  who  wants  to 
borrow  it  will  promise  to  give  back,  at  the  end  of  the  year,  not  only  a  new 
plane  to  replace  the  old  one  which  has  worn  out,  but  a  plank  in  addition. 
George  criticises  this  as  inconclusive,  since  the  only  way  in  which  the  owner 
of  the  plane  could  have  obtained  a  plank  was  by  working  with  it ;  but  says 
that  if  one  person  lends  another  a  calf,  the  productive  powers  of  nature 
will  put  him  in  a  position  to  return  a  cow  at  the  end  of  the  year  [without 
working  :  a  curious  conception  of  farm  life],  and  that  this  justifies  interest, 
because  capital  gives  control  of  the  productive  forces  of  nature.  In  point 
of  fact  there  is  no  essential  difference  between  the  two  cases.  We  allow  in- 
terest because  it  is  for  the  advantage  of  the  community  to  encourage  a  man 
to  save  capital  which  will  support  people  in  making  more  planes  than  he 
himself  can  use,  or  in  bringing  up  more  animals  than  he  himself  can  watch. 


138  INVESTMENT  OF  CAPITAL 

What  this  relation  was  depended  partly  on  the  number 
of  persons  who  needed  ready  money  and  were  prepared 
to  sell  future  income  for  that  purpose,  and  partly  on  the 
security  felt  by  the  buyers  that  their  tenure  and  income 
would  be  undisturbed.  The  ratio  of  the  selling  price  to 
the  income  is  known  as  the  rate  of  capitalization.  Where 
there  was  a  well-defined  rate  of  capitalization  it  amounted 
to  almost  the  same  thing  as  an  interest  rate  to  the  in- 
vestor. Instead  of  loaning  money  at  five  per  cent  he  could 
buy  a  piece  of  rented  land  at  twenty  times  the  annual 
rental.  Even  where  the  fee  of  the  land  was  not  actually 
sola,  it  often  happened  that  fictitious  rent  charges  were 
created  and  the  right  to  receive  these  charges  forever  was 
sold  for  a  lump  sum  ;  \vhich  amounted  virtually  to  an 
interminable  loan  at  interest  secured  by  the  productivity 
of  the  land.  The  German  word  for  interest  {Zins)  is 
derived  from  the  census  or  rent  charge  thus  capitalized. 

§  154.  When  interest  was  once  recognized  as  a  legiti- 
mate thing,  the  authorities  were  not  slow  to  profit  by  it ; 
sometimes  in  questionable  ways.  Governments  were  en- 
abled, by  the  promise  of  interest,  to  obtain  in  the  form  of 
voluntary  contributions  sums  which  they  could  not  have 
secured  by  taxation  without  danger  of  revolt.  Privileged 
classes  or  individuals  were  allowed  to  establish  pawn- 
brokers' shops  and  other  doubtful  agencies  as  a  means  of 
making  profits  by  loaning  money.  All  these  things,  in  ' 
spite  of  the  evils  connected  with  them,  taught  the  states- 
men and  the  public  the  usefulness  of  a  fund  of  capital 
and  the  power  of  a  small  fixed  return  to  lead  people  to 
save  and  invest  such  capital.  The  modern  savings  bank, 
which  offers  depositors  a  low  rate  of  interest  and  then 
invests  the  money  thus  obtained  in  channels  which  the 
depositors  could  not  have  used  by  themselves,  either 
because  their  individual  savings  were  too  small  or  their 
business  experience  inadequate,  is  an  example  of  what 
can  be  done  in  this  way.     The  life  insurance  company, 


USUR  Y  LA  WS.  1 39 

when  properly  managed,  is  an  almost  equally  effective — 
indeed,  in  some  respects  a  more  effective — means  to  the 
same  end.'  Both  these  institutions  give  a  stimulus  to  save 
and  avoid  the  necessity  of  hoarding.  They  thus  cause 
the  public  capital  to  be  increased  and  to  be  effectively 
utilized. 

§  155.  It  is  one  thing  to  recognize  the  usefulness  of  the 
system  of  interest ;  it  is  quite  another  thing  to  leave  bor- 
rowers and  lenders  at  liberty  to  fix  the  rate  of  interest  by 
mutual  agreement.  To  a  large  section  of  the  public  it 
seems  as  if  the  lender  had  every  advantage  over  the 
borrower  in  settling  the  terms  of  such  a  transaction,  and 
were  likely  to  make  an  unfair  use  of  this  advantage.  He 
has  capital  and  can  wait,  while  the  borrower  cannot ;  he 
has  intelligence  to  see  what  other  people  are  doing,  while 
the  borrower's  vision  is  often  much  more  restricted. 
Under  the  influence  of  these  ideas  nearly  every  nation 
has  passed  usury  laws,  fixing  a  legal  rate  of  interest, 
stigmatizing  any  charge  above  that  rate  as  usury,  declar- 
ing contracts  at  higher  rates  void,  and  often  visiting  the 
lender  with  the  severest  penalties. 

Where  a  large  part  of  the  borrowers  are  so  ignorant  that 
there  is  no  effective  competition  among  capitalists,  and 
no  market  rate  of  interest,  such  prohibitions  appear  to  be 
justified  ;  especially  if  the  legal  rate  is  placed  high  enough 

'  The  life  insurance  company  has  the  advantage  over  a  savings  bank  in 
knowing  when  it  will  receive  payments  and  (by  the  law  of  averages)  when  it 
must  make  them.  It  can  thus  keep  smaller  reserves  and  utilize  more  fully 
the  capital  entrusted  to  its  charge.  It  also  makes'  its  payments  at  the  time 
when  the  need  for  them  is  supposed  to  be  greatest.  It  is  further  claimed, 
as  a  public  advantage,  that  it  compels  a  certain  amount  of  saving  on  the 
part  of  the  poligy  holders  every  year.  But  this  is  quite  as  likely  to  prove  a 
burden  as  an  advantage.  While  such  compulsion  is  of  use  to  the  improvi- 
dent, it  may  prove  a  severe  load  to  the  unfortunate,  enhancing  instead  of 
lightening  the  weight  of  his  misfortune.  To  such  a  man,  and  indeed  to 
tKe  provident  investor  as  a  rule,  the  elasticity  of  his  relations  with  a  savings 
bank,  where  he  deposits  money  when  he  can  and  withdraws  it  when  he  must, 
is  an  inestimable  advantage. 


140  INVESTMENT  OF  CAPITAL. 

to  cover  the  rfsks  on  all  ordinary  loans.'  A  usury  law  of 
this  character  may  prevent  cases  of  shameless  extortion, 
where  the  creditor  so  presumes  on  the  debtor's  ignorance 
as  to  charge  rates  far  above  those  which  ordinarily  pre- 
vail. Among  non-commercial  peoples  there  is  serious 
danger  of  just  this  thing.  The  Russian  peasantry  is  now 
suffering  severely  from  loans  unintelligently  contracted, 
whose  charges  have  become  a  burden  too  heavy  to  be 
borne.  Anything  which  can  prevent  the  imposition  of 
such  burdens  is  likely  to  be  good  for  the  community.  A 
law  fixing  a  maximum  rate  of  interest  which  can  be  col- 
lected from  such  borrowers  may  cause  temporary  hard- 
ship by  making  some  men  unable  to  borrow ;  but  even 
this  is  much  better  than  an  assumption  of  obligations 
which  purchases  temporary  relief  at  the  expense  of  future 
independence. 

§  156.  In  commercial  communities  the  case  is  quite  dif- 
ferent. Where  each  borrower  knows  to  some  extent  what 
the  others  are  doing,  the  competition  of  different  lenders 
produces  a  market  rate  which  is  fair  to  both  sides.  Even 
if  the  borrower  in  a  particular  case  be  weak  and  the 
lender  strong,  the  latter  cannot  charge  a  high  rate  of 
interest,  because  other  lenders  stand  ready  to  underbid 
him.  The  rate  of  interest  for  any  given  class  of  risks 
will  fall  until  the  supply  and  demand  of  capital  become 
equal.  If  the  attempt  is  made  to  reduce  the  market  rate 
still  further  by  usury  laws,  the  effect  is  analogous  to  that 
of  laws  regulating  price  (§  97) ;  but  there  are  complica- 
tions, due  to  the  "ease  with  which  usury  laws  can  be 
evaded,  which  make  the  attempt  to  reduce  interest  by 
statute  even  more  conspicuously  futile  than  the  attempt 
to  reduce  prices. 

'  The  German  usury  law  names  no  specific  maximum  rate,  but  leaves  it  to 
the  judicial  authorities  to  determine  whether,  in  view  of  the  special  circum- 
stances of  each  case,  the  lender  has  taken  advantage  of  the  borrower's  ignor- 
ance or  distress  to  charge  more  than  a  fair  amount.  This  seems  a  wise 
method  of  procedure. 


EVASION  OF   USURY  LAWS.  I41 

If  the  legal  rate  of  interest  is  made  lower  than  the  conn- 
petitive  rate  which  equalizes  supply  and  demand,  and  if 
the  law  is  obeyed,  the  demand  for  loans  will  tend  to 
increase  in  consequence  of  the  lowness  of  the  rate,  and 
the  supply  of  capital  to  loan  will  tend  to  diminish.  There 
will  then  be  an  excess  of  demand  over  supply.  A  part  of 
those  who  want  loans  will  get  them  at  low  rates;  a  part 
will  not  get  them  at  all. 

If  we  could  be  sure  that  the  people  who  did  not  get  the 
loans  were  the  ones  who  did  not  need  them,  and  that 
their  willingness  to  pay  higher  rates  was  the  result  of  self- 
destroying  recklessness,  we  might  be  well  content  with 
the  effects  of  a  usury  law.  But  this  is  not  ordinarily  the 
case.  In  an  intelligent  community  the  men  who  are  will- 
ing to  pay  high  rates  are  quite  generally  the  ones  who  can 
make  productive  use  of  capital.  So  far  as  they  are  pre- 
vented from  borrowing,  the  active  use  of  capital  is 
lessened,  and  the  industrial  progress  of  the  locality  hin- 
dered. If  a  state  makes  a  law  fixing  interest  at  six  per 
cent  when  a  number  of  men  are  willing  to  pay  eight,  it 
simply  means  that  those  men,  if  they  obey  the  law, 
cannot  get  the  capital  they  want. 

§  157.  In  point  of  fact,  they  do  not  obey  the  law.  If  a 
borrower  is  really  desirous  to  get  a  loan  and  cannot  have 
it  at  low  rates,  there  are  many  indirect  ways  of  making 
the  interest  charge  higher  than  appears  on  the  face  of  the 
contract.  On  an  ordinary  industrial  loan,  the  borrower 
may  pay  a  large  commission  to  the  man  who  negotiates 
it,  part  of  which  can  go  to  the  lender ;  or  he  may  tacitly 
content  himself  with  the  receipt  of  a  sum  smaller  than 
the  nominal  amount  of  the  loan.  If  a  note  is  given  for 
$1,000,  payable  at  the  end  of  five  years,  bearing  six  per 
cent  interest  per  annum,  and  the  borrower  tacitly  accepts 
a  payment  of  $950  instead  of  $1,000  as  a  consideration 
for  this  note,  the  actual  rate  paid  is  about  seven  per 
cent  annually  instead  of  six.      On  short-time  loans  from 


142  INVESTMENT  OF  CAPITAL. 

banks,  the  means  of  evasion  are  yet  more  numerous  and 
more  difficult  to  detect.  The  bank  may  insist  on  the 
maintenance  of  a  large  deposit  account  in  its  hands, 
which  virtually  reduces  the  sum  lent  ;  or  it  may  make  a 
fictitious  charge  for  collection  of  the  note  at  maturity, 
which,  on  a  short-time  loan,  adds  a  great  deal  to  the  rate 
of  interest.  If  a  bank  discounts  a  sixty  day  note  at  six 
per  cent,  the  total  interest  charge  is  one  per  cent;  if  to 
this  figure  it  adds  one  quarter  of  one  per  cent  for  col- 
lection, it  greatly  increases  the  interest  rate  without 
directly  conflicting  with  the  letter  of  the  usury  law. 

If  intelligent  borrowers  want  loans  and  can  get  them  by 
using  these  means,  they  will  use  them.  The  borrower 
runs  little  or  no  risk  in  these  operations ;  it  is  not  against 
him  that  the  provisions  of  the  law  are  directed,  and  he 
does  not  regard  himself  as  a  lawbreaker.  The  case  of  the 
lenders  is  different.  They  run  a  slight  risk  ;  and  even  if 
the  act  cannot  be  brought  home  to  them,  they  know  that 
they  are  breaking  the  law.  Some  are  deterred  from  these 
transactions  by  their  risk  ;  more,  by  their  crookedness  and 
virtual  illegality.  Thus  while  the  demand  for  such  loans 
is  not  much  checked,  their  supply,  even  at  the  old  com- 
petitive rate,  is  considerably  diminished.  Therefore, 
while  the  more  scrupulous  lenders  are  kept  out  of  the 
market  by  a  usury  law,  the  less  scrupulous  ones  are  able 
to  take  advantage  of  the  reduced  competition  to  charge  a 
higher  rate  of  interest,  which  serves  as  a  more  or  less  ade- 
quate compensation  for  the  risk  to  their  pockets  and 
the  strain  on  their  consciences.  Meantime  the  borrowers 
are  suffering  both  from  the  scrupulousness  of  the  honest, 
who  refuse  them  capital,  and  from  the  unscrupulousness 
of  the  dishonest,  who  charge  them  extra  high  rates  ;  and 
even  if  some  borrowers  get  their  loans  a  little  cheaper 
from  the  operation  of  the  law,  the  gain  at  this  point  is 
dearly  purchased  by  the  loss  at  others. 

§  158.  While  the  system  of  interest  on  loans  has  won  its 


SECURITY  FOR  DEBTS.  1 43 

way  to  recognition,  imprisonment  for  debt  and  other 
personal  means  of  enforcing  payment  have  been  gradu- 
ally falling  into  disuse.  Increased  control  over  the  terms 
of  the  loan  has  gone  hand  in  hand  with  diminished 
power  over  the  person  of  the  debtor.  Both  of  these 
changes  arise  from  the  same  cause.  Each  is  a  virtual 
recognition  of  the  fact  that  a  loan  is  justified  by  the  pro- 
ductiveness of  the  thing  for  which  it  is  used,  rather  than 
by  the  wants  of  the  person  by  whom  it  is  borrowed.  Once 
having  grasped  this  fact,  we  can  draw  two  conclusions 
from  it.  (i)  If  a  loan  will  result  in  a  really  productive 
thing,  we  should  give  the  borrower  every  chance  to 
attract  capital  for  its  creation.  (2)  If  a  loan  will  not 
result  in  a  really  productive  thing,  we  should  give  the 
lender  no  inducement  to  advance  the  money  except  the 
motive  of  personal  kindness,  and  no  right  to  impose 
future  burdens  on  the  debtor  which  will  belie  or  conflict 
with  the  motive  of  kindness.  Both  of  these  results  are  in 
large  measure  accomplished  by  making  the  creditor  look 
to  the  investment  rather  than  to  the  borrower  for  his 
security.  We  have  abolished  imprisonment  for  debt,  not 
so  much  on  account  of  the  hardship  to  the  debtor,  who 
may  be  a  very  worthless  person,  as  on  account  of  the  dis- 
advantage to  society  in  having  money  lent  on  personal 
security.  It  is  not  that  we  love  the  debtor  more,  but  the 
creditor  less.  It  is  for  like  reasons  that  civilized  commu- 
nities have  so  frequently  abolished  or  mitigated  laws  con- 
cerning attachjpent  of  wages.  If  a  store  has  given  a 
workman  credit,  it  seems  at  first  sight  fair  that  the  owner 
of  the  store  should  have  a  legal  claim  on  the  workman's 
wages  when  they  become  due.  Yet  the  evils  connected 
with  store  credit  are  so  considerable,  and  the  unwisdom 
of  encouraging  workmen  to  get  into  debt  is  so  manifest, 
that  society  discountenances  the  creation  of  such  debts  by 
removing  or  restricting  the  facilities  for  their  collection. 
§  159.  Another  phase  of  the  limitation  of  personal  lia- 


144  INVESTMENT  OF  CAPITAL. 

bility,  and  one  which  has  stimulated  productive  specula- 
tion in  the  very  highest  degree,  is  exemphfied  by  the 
position  of  the  shareholders  in  a  modern  industrial  corpo- 
ration or  joint  stock  company.  The  old  theory  was  that 
if  a  man  went  into  business  of  any  kind  he  should  be 
held  personally  responsible  for  all  debts  incurred  in  con- 
nection with  it.  In  case  of  an  individual  who  has  mat- 
ters under  his  immediate  control  this  is  perfectly  right. 
In  the  case  of  a  partnership  it  may  work  injustice,  when 
one  man  is  held  responsible  for  debts  incurred  by  the 
unwisdom  or  wrong  doing  of  his  partner;  but  as  long 
as  the  number  of  partners  is  small,  each  can  be  presumed 
to  know  if  the  other  is  doing  wrong  and  can  be  held 
accountable  for  any  failure  to  protect  himself  and  the 
public.  But  as  a  concern  becomes  larger  and  larger,  it 
grows  more  difficult  for  a  number  of  individual  owners  to 
see  how  it  is  managed.  If  a  hundred  men  unite  their 
capital  in  an  industry  they  must  necessarily  put  the  con- 
trol in  the  hands  of  a  board  of  directors,  and  can  only 
know  by  occasional  reports  how  their  business  is  con- 
ducted. Under  these  circumstances  it  is  manifestly 
unjust  to  hold  them  all  responsible  to  the  extent  of 
their  whole  private  fortunes  for  mismanagement  on  the 
part  of  a  director.  The  investors  know  less  about  the 
actions  of  the  director  than  do  those  who  have  commercial 
dealings  with  him.  Under  such  circumstances  it  is  quite 
fair  to  transfer  a  part  of  the  responsibility  for  loss  from 
the  shoulders  of  the  investor  to  those  of  the  outside 
public.  It  is  not  only  equitable,  it  is  necessary.  With- 
out such  limitation  of  responsibility  it  is  practically  im- 
possible to  get  thfe  necessary  capital  subscribed  for 
undertakings  where  the  investors  cannot  exercise  per- 
sonal supervision.  One  of  the  earliest  attempts  to  meet 
this  need  was  by  the  partnership  /';/  commenda,  where  a 
comparatively  small  number  of  persons  assumed  the 
active  management  and  the  responsibilities  of  the  enter- 


LIMITED  LIABILITY.  I45 

prise,  while  others  simply  furnished  capital  for  the  sake 
of  a  share  in  the  profits.  A  better  form  is  the  modern 
joint  stock  company,  in  which  all  shareholders  stand  on  a 
common  basis  of  limited  liability,  and  choose  a  few  repre- 
sentatives to  exercise  active  supervision  of  the  business. 
The  system  of  limited  liability  distinguishes  such  a  cor- 
poration from  a  partnership.  If  a  man  puts  a  thousand 
dollars  into  a  partnership,  and  the  firm  contracts  debts  in 
excess  of  its  resources,  he  may  be  called  upon  to  pay 
many  thousands  more  to  satisfy  the  claims  of  creditors. 
But  if  he  puts  his  thousand  dollars  into  railroad  stock,  he 
is  quit  of  all  further  responsibility.  His  liability  is  limited 
to  the  amount  of  his  original  investment.  If  the  company 
is  well  managed  he  will  get  his  dividends.  If  it  is  badly 
managed  he  will  probably  lose  his  money.  But  his  loss 
will  be  confined  to  the  amount  of  his  stock  subscription. 
If  the  liabilities  of  the  company  exceed  its  resources,  that 
is  the  affair  of  the  creditors.  They  can  take  possession  of 
the  concern  and  run  it  to  suit  themselves ;  but  they  have 
no  further  claims  against  the  individual  stockholders. 
What  is  true  of  railroad  stock  is  generally  true  of  manu- 
facturing stock,  and  partially  true  of  the  stock  of  banks 
and  of  trading  corporations.  The  liability  of  the  indi- 
vidual shareholders  is  in  each  case  accurately  defined 
by  statute. 

§  160.  It  was  with  much  reluctance  that  the  system  of 
limited  liability  was  admitted  as  an  integral  part  of  cor- 
poration law.  It  seemed  like  an  attempt  of  the  investors 
to  secure  large  profits  from  an  enterprise  without  assum- 
ing corresponding  liabilities.  But  the  experience  of  coun- 
tries like  Great  Britain  or  states  like  Massachusetts,  which 
strove  to  restrict  the  introduction  of  limited  liability, 
proved  that  this  conservatism  was  either  unwise  or  un- 
just :  unwise,  so  far  as  it  prevented  investments  of  capital 
on  a  scale  which  the  community  required  in  order  to 
utilize  modern  improvements  in  the  arts;  unjust,  because 


146  INVESTMENT  OF  CAPITAL. 

in  the  dealings  of  large  concerns  the  creditors  were  in  a 
better  position  to  prevent  the  creation  of  bad  debts  than 
were  the  individual  shareholders.  The  experiences  in  the 
City  of  Glasgow  Bank  failure  in  1878,  which  reduced  to 
penury  a  number  of  small  investors  who  had  no  possible 
control  over  the  affairs  of  the  bank  or  moral  responsibility 
for  its  management,  were  sufficient  to  prove  to  the  most 
conservative  how  ill  adapted  was  the  old  system  to  the 
conditions  of  modern  investment. 

As  the  need  of  permanent  improvements  gave  shape  to 
the  system  of  land  tenure,  so  the  need  of  concentration 
of  capital  gave  shape  to  corporation  law.  When  a  hun- 
dred men  putting  their  capital  together  could  do  much 
more  for  society  than  if  they  kept  it  separate,  it  was 
necessary  to  devise  some  system  which'  should  make  it 
easy  and  safe  for  them  to  unite.  The  modern  corpora- 
tion, combining  as  it  does  the  principles  of  perpetual  suc- 
cession, representative  government,  and  limited  liability, 
has  met  the  industrial  needs  of  the  case.  The  feature 
of  perpetual  succession  prevents  any  loss  of  continuity  in 
operation  when  one  of  the  shareholders  dies  or  transfers 
his  interest.  The  feature  of  representative  government 
allows  the  different  shareholders  to  choose  a  board  of 
directors  small  enough  in  number  to  secure  efficiency  of 
control  and  operation.  The  feature  of  limited  liability, 
whereby  each  shareholder  is  responsible  for  the  debts 
of  the  concern  only  to  the  extent  of  his  original  hold- 
ing, protects  him  from  losses  due  to  the  misconduct 
of  other  shareholders,  which  the  large  size  of  the  corpo- 
rate body  makes  him  unable  to  control.  The  union  of  all 
these  features  allows  the  public  to  secure  the  economy 
resulting  from  large  accumulations  of  capital  limited 
neither  by  the  lifetime  of  a  few  individuals  nor  by  the 
extent  of  their  private  fortunes. 

§  161.  These  institutions  and  the  motives  connected 
with  them  have  served   their  purpose   so   fully  that  in 


OVERPRODUCTION  OF  MACHINERY.  1 47 

modern  times  we  are  quite  as  apt  to  find  an  excess  in  the 
saving  and  investment  of  capital  as  to  find  a  deficiency. 

In  the  beginnings  of  civilization  scarcity  of  capital  is  a 
most  serious  and  imminent  economic  danger.  Under  such 
conditions  anything  which  will  lead  people  to  save  and  use 
their  savings  productively  is  good  for  society.  But  in  more 
modern  times,  there  is  a  temptation  to  invest  capital  in 
machinery  to  such  a  degree  as  to  reduce  the  demand  for 
the  products  of  machinery.  If  one  man  tries  to  save,  and 
convert  his  capital  into  permanent  investments,  he  can  do 
so  ;  but  if  every  one  tries  to  save,  a  great  many  people  will 
fail  to  realize  their  expected  profit  because  of  an  over-pro- 
duction of  machinery.  It  is  in  this  way,  rather  than  by  a 
fall  in  the  rate  of  interest,  that  the  effect  of  over-accumu- 
lation of  capital  shows  itself  most  conspicuously.  This 
mistaken  investment  proves  a  loss  to  society  as  well  as  to 
the  individuals  immediately  concerned.  In  a  given  stage 
of  the  arts,  and  with  given  habits  of  consumption,  a  certain 
amount  of  machinery  can  be  advantageously  utilized  ;  a 
larger  amount  than  this  is  a  waste.  We  have  for  generations 
been  cultivating  motives  which  should  make  individuals 
reduce  their  consumption  and  increase  their  investment 
until  we  could  obtain  the  required  amount ;  and  we  have 
apparently  overdone  the  matter.  It  is  certain  that  the 
increased  utilization  of  existing  capital  which  follows  any 
stimulus  to  consumption  is  apt  to  be  more  conducive  to 
general  prosperity,  than  a  corresponding  increase  in  the 
amount  of  investment  without  such  stimulus.  A  super- 
ficial observation  of  this  fact  leads  many  people  to  adopt 
means  of  stimulating  consumption  which  are  transient  in 
their  nature,  and  which  provoke  a  reaction  which  makes 
matters  worse  in  the  end  than  they  were  at  the  beginning 
Currency  inflation  may  serve  as  a  type  of  such  means. 
The  danger  of  measures  like  this  is  greatly  increased  if 
the  economist  shuts  his  eyes  to  the  small  fraction  of  truth 
hidden  amid  larger  fractions  of  error  in  the  arguments  of 


148  INVESTMENT  OF  CAPITAL. 

their  advocates.  The  modern  civilized  world  is  in  per- 
petual danger  of  under-consumption.  Too  many  of  its 
members  use  their  supplies  of  products,  not  to  purchase 
the  consumable  products  of  others,  but  to  duplicate  ma- 
chinery and  other  permanent  investments.  Under  the 
operation  of  the  credit  system  the  danger  in  the  process 
remains  unseen,  until  masses  of  such  machinery  come  into 
use  ;  then  its  comparative  worthlessness  becomes  ap- 
parent. The  men  who  own  it  find  themselves  poor 
instead  of  rich.  The  laborers  who  have  been  trained 
to  produce  it  are  thrown  out  of  employment,  and  the 
community  is  plunged  into  a  commercial  crisis  (ch.  ix). 

§  162.  The  historical  study  of  the  origin  and  develop- 
ment of  capital  in  its  various  forms  may  guard  us  against 
several  rather  prevalent  fallacies. 

In  the  first  place  we  must  beware  of  treating  rights  to 
land,  or  to  the  management  of  corporate  property,  as 
"  absolute  "  or  "  natural  "  ones.  This  danger  is  not  so 
great  now  as  it  was  a  century  ago,  for  political  science 
makes  far  less  of  natural  rights  than  it  once  did.  But 
enough  of  the  old  view  remains '  to  make  it  worth  while 
to  emphasize  the  fact  that  the  various  institutions  under 
which  capital  is  invested  have  been  sanctioned  by  society 

'  A  curious  aftermath  of  the  old  theories  of  natural  right  is  seen  in  some 
of  the  modern  theories  of  natural  value.  Labor,  land,  and  capital  are  re- 
garded as  co-operating  in  production,  and  an  attempt  is  made  to  deter- 
mine the  natural  share  of  the  product  which  each  factor  obtains  by  free 
competition,  under  the  assumption  of  a  certain  normal  degree  of  intelligence 
in  the  investment  of  capital  and  development  of  land.  But  this  is  a  thing 
which  we  cannot  assume  ;  and  it  is  precisely  because  we  cannot  assume  it, 
that  the  various  institutions  described  in  the  foregoing  chapter  are  tolerated. 
Interest  and  rent  and  the  different  forms  of  monopoly  gain  have  grown  up  as 
means  of  enabling  the  community  to  make  progress  by  the  elimination  of 
investors  of  lower  degrees  of  intelligence  and  the  substitution  of  better  ones. 
The  habits  of  mind  which  determine  the  relative  value  of  present  and  future 
goods  are  so  bound  up  with  these  institutions  and  these  differences  of  intelli- 
gence, that  reasonings  based  upon  the  continuance  of  present  methods  of 
valuation  apart  from  existing  institutions  and  their  historical  causes,  seem  at 
once  hazardous  and  unprofitable. 


EXPROPRIA  TION.  1 49 

for  the  sake  of  their  effect  on  the  public  well-being  ;  and 
that  they  derive  their  efficacy  from  this  sanction.  When 
they  stand  in  the  way  of  progress,  society  does  not  hesi- 
tate to  modify  or  limit  them.  The  power  of  expropria- 
tion, based  on  the  right  of  "  eminent  domain  "  inherent 
in  the  people,  furnishes  a  conspicuous  instance  of  such 
limitation.  If  a  man  uses  his  land  tenure  to  stand  in  the 
way  of  public  improvement,  the  government  arranges  a 
process  by  which  his  land  can  be  taken  from  him,  whether 
he  will  or  no ;  saying  that  the  community  has  rights  to 
such  property  which,  in  case  of  necessity,  override  the 
individual  will.  In  like  manner,  if  a  corporation  uses  its 
authority  to  harm  the  community  which  depends  on  its 
services,  the  government  brings  its  "  reserved  police 
power  "  into  play  to  check  such  abuses  of  authority.  It 
is  perfectly  clear  that  in  case  of  public  necessity  private 
property  may  be  taken  by  the  state,  always  providing 
that  "  due  process  of  law "  is  used  and  compensation 
given  to  the  owners. 

§  163.  A  little  study  of  this  idea  of  compensation  will 
show  us  how  much  less  absolute  (if  such  a  phrase  may 
be  permitted)  are  the  rights  of  capital  than  the  more  gen- 
eral right  of  property.  Any  considerable  impairment  of 
the  right  of  property  would  involve  a  change  in  the  whole 
industrial  system,  and  even  in  the  moral  system  on  which 
society  is  organized.  Property-right  is  the  chief  modern 
motive  to  labor,  to  care,  and  to  avoidance  of  waste  and 
destruction.  Rights  of  capital,  however  important  or 
beneficial  in  their  effects,  are  much  narrower  in  their 
scope.  They  affect  the  methods  of  management  of  in- 
dustry, rather  than  the  motives  on  which  all  industry  is 
based.  They  can  be  seriously  modified  without  changing 
the  general  substructure  of  society.  There  can  be  no 
reasonable  doubt  that  they  will  be  thus  modified  as  better 
methods  are  found  to  take  their  place. 

§  164.     But  it  is  a  much  more  serious  error  to  go  to 


I50  INVESTMENT  OF  CAPITAL. 

the  other  extreme,  and  assume  that  they  can  be  modified 
at  will  by  the  action  of  organized  force.  The  fact  that 
the  present  organization  of  capital  is  the  result  of  histori- 
cal development,  and  that  present  forms  have  survived 
while  others  failed,  is  the  strongest  proof  of  their  vitality. 
George's  argument  that  collective  property  in  land  is  per- 
fectly practicable  because  so  many  races  have  tried  it  and 
given  it  up,  is  but  the  reductio  ad  absurdiim  of  many 
attacks  on  the  present  industrial  system.  While  it  is  un- 
doubtedly true  that  the  various  rights  of  the  capitalist 
depend  upon  the  existence  of  a  civilized  society  which 
maintains  them,  it  seems  equally  true  that  the  existence 
of  a  civilized  society  in  the  stress  of  the  struggle  for  exist- 
ence among  different  members  of  the  human  race  depends, 
for  the  present  at  any  rate,  upon  maintaining  the  rights 
of  the  capitalist. 


CHAPTER  VI. 

COMBINATION   OF  CAPITAL. 

Modem  Tendencies  toward  Monopoly — Their  Effect  on  Prices — Limitation 
of  Profits — Laws  Fixing  Rates — Enforcement  of  Responsibility. 

T.  H.  Farrer  :   "  The  State  in  its  Relation  to  Trade."     London,  1883. 

The  general  subject  of  monopoly  is  not  adequately  dealt  with  in  economic 
literature — especially  in  book  form.  On  railroads  and  railroad  charges, 
mention  may  be  made  of  C.  F.  Adams,  "  Railroads,  their  Origin  and 
Problems,"  New  York,  1878;  A.  T.  Hadley,  "Railroad  Transportation, 
its  History  and  its  Laws,"  New  York,  1885  ;  W.  D.  Dabney,  "  The 
Public  Regulation  of  Railways,"  New  York,  1889  ;  W.  M.  Acworth,  "The 
Railways  and  the  Traders,"  London,  1891  ;  and,  above  all,  of  G.  Cohn, 
"  Untersuchungen  tiber  die  Englische  Eisenbahnpolitik,"  Leipzig,  1874, 
1875,  1S83.  The  third  volume  of  Cohn  gives  the  best  general  investigation 
of  the  principles  regulating  monopoly  price.  Compare  also  the  fifth  book 
of  A.  Marshall,  "Principles  of  Economics,"  3d  ed.,  London,  1895. 

For  further  references  on  closely  allied  subjects  see  chapter  xi, 

§  165.  The  investment  of  fixed  capital  described  in  the 
preceding  chapter  has  wrought  much  more  radical  changes 
in  manufactures  and  transportation  than  in  agriculture. 

There  are  several  reasons  for  this  difference.  In  the 
first  place,  the  productiveness  of  factories  has  increased 
faster  than  that  of  farms.  No  means  has  been  found  for 
indefinitely  enlarging  the  amount  of  food  which  can  be 
obtained  from  a  given  area.  We  can  perhaps  double  it  or 
treble  it ;  but  no  investment  of  capital,  wise  or  unwise,  is 
likely  to  increase  it  a  hundred-fold.  Therefore  no  one 
farm,  however  large,  is  likely  to  supply  more  than  a  very 
small  fraction  of  the  world's  consumption.  Until  there 
is  some  radical  change  in  the  art  of  food  production,  we 

151 


152  COMBINATION  OF  CAPITAL. 

shall  continue  to  have  competition  between  different 
producers.  Nor  has  the  investment  of  fixed  capital  in 
agriculture  gone  so  far  that  its  interest  and  maintenance 
constitute  the  chief  elements  in  the  cost  of  food  pro- 
ducts. They  form  an  important,  but  not  a  dominant 
factor.  Under  these  circumstances,  the  theory  of  normal 
price,  though  hindered  in  its  operation,  is  by  no  means 
rendered  inapplicable.  There  is  a  slight  delay  in  the 
adjustment  between  price  and  cost ;  there  is  a  certain 
margin  between  the  price  which  will  induce  new  com- 
petitors to  enter  the  field,  and  that  which  will  drive  out 
the  old  ones.  But,  in  the  majority  of  cases,  we  can  still 
rely  on  competition  to  protect  the  consumers  and  do  no 
gross  injustice  to  the  producers. 

§  166.  In  manufactures  the  case  is  different.  The  units 
of  capital  are  much  larger.  Each  producer  can  extend 
his  output  with  a  gain  rather  than  a  loss  in  economy.  If 
he  can  increase  his  sales,  there  will  be  only  a  slight  in- 
crease— perhaps  none  at  all — in  the  expense  for  wages 
and  materials  and  a  decided  decrease  in  the  share  of  the 
charges  .on  fixed  capital,  which  each  unit  of  product  must 
pay.  There  is  no  fixed  standard  of  cost  which  we  can 
treat  as  the  normal  price  ;  for  the  cost  per  unit  of  product 
depends  on  the  quantity  sold,  falling  as  sales  increase. 

The  price  which  will  induce  new  competitors  to  enter 
the  field  is  also  much  higher  than  that  which  will  lead 
old  ones  to  withdraw.  No  concern  will  quit  competition 
as  long  as  it  can  pay  an  appreciable  part  of  its  interest 
charges.  It  is  better  to  lose  part  of  your  interest  on 
every  piece  of  goods  you  sell,  than  to  lose  the  whole  of 
it  on  every  piece  you  do  not  sell.  As  long  as  the  price 
received  more  than  covers  the  expense  for  wages  and  mate- 
rials each  of  the  old  factories  will  continue  to  compete. 
Even  if  it  changes  ownership  by  foreclosure  it  will  remain 
in  operation.  But,  on  the  other  hand,  no  new  competitor 
will  be  called  into  being  unless  the  price  is  high  enough 


T 


CONDITIONS    WHICH  PROMOTE  IT.  1 53 

to  afford  a  liberal  profit,  after  paying  interest,  mainte- 
nance, and  other  charges  on  fixed  capital  invested  under 
modern  methods.  Thus  prices,  instead  of  constantly 
tending  to  gravitate  toward  an  equitable  figure,  oscillate 
between  two  extremes.  The  rate  of  production,  at  figures 
which  give  a  fair  profit,  is  usually  either  much  larger  than 
the  rate  of  consumption,  or  much  smaller.  In  the  former 
case,  prices  are  unremunerative  and  unjust  to  the  pro- 
ducer ;  in  the  latter  case,  they  are  oppressive  to  the  con- 
sumer. The  average  price  resulting  from  such  fluctuations 
may  perhaps  be  a  fair  one  ;  but  the  wide  changes  of  price 
are  disastrous  to  all  parties  concerned. 

§  167.  The  failure  of  competition  to  secure  fair  or 
stable  rates  gives  additional  force  to  the  pressure  toward 
combination  which  always  exists  among  certain  classes  of 
business  men. 

Many  writers  on  combination  treat  it  as  a  new  thing, 
peculiar  to  the  present  stage  of  commercial  and  industrial 
development.  This  is  a  mistake.  Efforts  at  trade  com- 
bination have  always  been  made,  and  have  not  infre- 
quently been  successful.  The  more  we  study  the  past 
history  of  any  line  of  business,  the  more  we  are  impressed 
with  the  extent  of  such  efforts  at  combination.  The  dis- 
tinctive feature  of  the  present  age  lies  in  the  existence  oi 
certain  added  causes  peculiar  to  this  stage  of  commercial 
development,  which  work  in  favor  of  those  who  advocate 
combination,  and  make  it  harder  for  independent  competi- 
tors to  resist  it,  or  for  the  law  to  prohibit  it  on  grounds 
of  public  policy. 

§  168.  The  economy,  to  the  public  as  well  as  to  the  indi- 
vidual, of  concentrating  capital  as  much  as  possible,  always 
furnishes  a  pretext,  and  sometimes  a  real  reason,  for  sub- 
stituting combination  for  competition.  In  some  cases  the 
industrial  units  which  are  necessary  for  proper  utilization 
of  labor  have  become  so  large  as  to  produce  actual  mo- 
nopoly.    This  is  especially  true  of  distributive  services, 


154  COMBINATION  OF  CAPITAL. 

like  water,  gas,  telegraphs,  or  railroads.  The  attempt  to 
have  two  independent  agencies  perform  any  of  these 
services  for  a  single  community  is  apt  to  result  in  loss  to 
the  producer  and  inconvenience  to  the  consumer.  So 
much  of  the  expense  of  delivery  of  water  or  gas  is  con- 
nected with  the  laying  of  mains,  that  a  system  which  dupli- 
cates these  mains  is  a  public  burden.  So  much  of  the 
advantage  of  the  telephone  service  to  each  subscriber  lies 
in  the  power  of  reaching  all  the  other  subscribers,  that 
the  existence  of  two  competing  exchanges  in  the  same 
city  destroys  the  usefulness  of  both.  In  railroad  trans- 
portation a  single  organized  company  can  put  lines  just 
where  they  are  needed,  and  run  trains  at  the  time  when 
the  public  wants  them.  If  the  same  service  is  performed 
by  two  companies,  there  will  be  unnecessary  duplication 
of  lines  in  some  places,  and  failure  to  build  needful  ones 
in  others  ;  while  the  train  times  and  train  connections  will 
be  arranged,  not  with  regard  to  the  maximum  convenience 
of  the  public,  but  with  a  view  to  increase  the  business  of 
one  competitor  at  the  expense  of  the  other.  Even  in  cases 
where  the  necessity  for  concentrated  management  is  not 
quite  so  marked  as  in  those  just  described,  the  competi- 
tion of  different  concerns  always  involves  a  loss,  from  the 
need  of  maintaining  too  many  selling  agencies,  the  ex- 
pense of  unnecessary'  advertising,  and  the  lack  of  proper 
utilization  of  fixed  capital.' 

'  The  increasing  profit  when  we  enlarge  the  output  of  a  factory  is  often 
contrasted  with  the  diminishing  profit  when  we  attempt  to  do  the  same  thing 
on  a  farm  ;  and  some  writers  say  that  industries  with  large  fixed  capital  are 
subject  to  a  "law  of  increasing  return"  which  contrasts  with  the  law  of 
diminishing  return  that  prevails  in  agriculture.  This  statement  hardly  goes 
to  the  root  of  the  matter.  The  distinction  is  not  so  much  between  kinds  of 
industry  as  between  kinds  of  capital.  With  a  given  amount  of  fixed  capital, 
whether  invested  in  agriculture  or  in  manufactures,  any  increase  of  output 
diminishes  the  charges  on  such  capital  per  unit  of  product.  The  current 
expenses  per  unit  of  product  do  not  thus  tend  to  diminish  as  the  output  in- 
creases :  in  fact,  when  a  certain  relation  has  been  established  between  out- 


AGREEMENT   TO  MAINTAIN  RATES,  I  55 

§  169.  The  simplest  form  of  combination  is  an  agree- 
ment to  maintain  rates,  where  the  several  competitors 
promise  not  to  reduce  their  prices  below  a  scale  fixed  by 
common  consent,  with  a  view  to  giving  producers  a  fair 
profit.  But  such  an  arrangement  rarely  proves  effective. 
Each  company  is  at  the  mercy  of  its  agents.  They  will 
try  to  steal  business  from  rival  concerns  by  cutting  rates. 
If  they  are  allowed  a  commission  on  sales,  they  will  divide 
it  with  the  buyer ;  if  they  are  not  allowed  such  a  commis- 
sion, they  will  find  a  hundred  different  ways,  less  obvious 
but  hardly  less  effective,  of  rendering  a  rate  agreement 
nugatory.  It  is  so  profitable  for  one  concern  to  steal  busi- 
ness from  another,  and  so  disastrous  to  its  rival  to  lose 
the  business,  that  the  latter  will  always  suspect  the  former 
of  bad  faith  when  any  irregularities  of  its  agents  are  dis- 
covered or  surmised,  A  contest  will  be  inaugurated  which 
tends  to  drive  prices  far  below  the  normal  rate  ;  usually 
to  the  advantage  of  those  who  least  need  and  least  deserve 
such  reductions.  The  honest  and  straightforward  business 
man  is  content  with  the  one-price  system.  He  is  not  seek- 
ing to  gain  an  unfair  advantage  over  his  neighbor,  but  to 
be  treated  squarely.  Fluctuating  and  uncertain  rates  are 
not  what  he  desires,  for  he  knows  that  his  less  scrupulous 
rival  will  be  the  first  to  gain  the  benefit  of  such  changes. 
It  is  better  for  A  to  be  paying  30  cents  and  be  sure  that 


put  and  fixed  capital,  the  current  expenses  per  unit  of  product  increase  very 
rapidly.  Whether,  with  an  increase  of  output,  the  gain  from  fuller  use  of 
fixed  capital  offsets  the  loss  from  increased  current  expenses,  depends  partly 
on  the  amount  of  the  fixed  capital,  but  chiefly  on  the  degree  to  which  it  was 
previously  utilized.  If  it  was  not  fully  utilized  we  shall  see  the  phenomena 
of  increasing  return  ;  if  it  was  already  fully  utilized,  we  shall  see  those  of 
diminishing  return.  The  apparent  contrast  between  agriculture  and  manu- 
facturing in  this  respect  is  chiefly  due  to  the  fact  that  population  habitually 
approaches  a  limit  set  by  the  arts  of  food  production,  so  that  its  agricultural 
improvements  are  always  employed  nearly  to  the  limit  of  profitable  output ; 
while  in  manufactures  there  is  no  such  increase  of  demand,  and  fixed  capital 
is  often  quite  inadequately  employed. 


156  COMBINATION  OF  CAPITAL. 

his  competitor  B  is  also  paying  30  cents,  than  for  A  to 
pay  25  cents  when  B  pays  20.  Wars  of  rates,  though 
they  produce  very  low  prices,  generally  work  to  the  dis- 
advantage of  the  honest  purchasing  public  and  to  the 
advantage  of  the  shrewder  speculators. 

§  170.  A  single  instance  will  serve  to  illustrate  the  diffi- 
culty of  maintaining  rates  by  agreement.  Twenty-five 
years  ago  a  fair  rate  for  cattle  from  Chicago  to  New  York 
was  about  $110  a  carload.  If  the  large  shippers  of  cattle 
wished  to  break  this  rate,  they  would  drive  all  their  steers 
to  one  of  the  competing  lines  and  would  spread  a  rumor 
in  the  commercial  columns  of  the  newspapers  that  this 
line  was  not  maintaining  rates.  This  rumor,  combined 
with  the  fact  that  the  line  in  question  was  getting  all  the 
shipments,  would  make  the  other  lines  think  there  was 
foul  play,  and  lead  them  to  order  a  reduction  in  rates  to 
meet  the  supposed  cut.  As  soon  as  any  such  reduction 
was  announced  the  shippers  would  all  divert  their  cattle 
to  the  lines  that  had  made  it.  The  road  that  was  carry- 
ing everything  yesterday  received  nothing  to-day  ;  and 
indignant  at  the  bad  faith  on  the  part  of  its  rivals  it  would 
meet  their  reduction  by  a  yet  larger  reduction.  To  this 
process  there  was  no  limit  as  long  as  the  price  paid  for  the 
carriage  of  cattle  more  than  covered  the  expenses  of  load- 
ing and  hauling.  Under  the  excitement  of  the  contest  the 
railroad  agents  sometimes  went  even  lower  than  this,  and 
carried  cattle  at  an  actual  loss  in  order  to  prevent  rivals 
from  making  a  profit. 

§  171.  When  competing  concerns  are  thus  at  the  mercy 
of  their  agents  or  of  outsiders,  a  resort  to  closer  forms  of 
combination  is  inevitable.  If  it  proves  that  an  agreement 
to  maintain  rates  is  not  enough,  they  will  arrange  a  pool 
or  division  of  traffic.  Pools  take  three  distinct  forms. 
Sometimes  rival  concerns  divide  the  field  ;  as  when  com- 
peting gas  companies  agree  to  serve  different  streets  in  the 
same  city,  or  when  competing  railroads  agree  not  to  build 


DIVISION  OF   TRAFFIC.  1 57 

branch  lines  into  one  another's  territory.  Sometimes 
they  divide  the  traffic  itself.  If  three  railroads  find  that 
each  has  done  an  approximately  equal  amount  of  busi- 
ness during  the  year  preceding,  they  may  arrange  to  divide 
the  competitive  business  equally,  and  let  each  company 
take  one-third.  If  more  than  one-third  of  the  shippers 
desire  to  use  one  of  the  three  lines  during  the  coming 
month,  that  line  agrees  to  turn  over  a  part  of  its  business 
to  one  of  its  rivals.  If  the  different  railroads  are  not  of 
equal  importance,  the  traffic  can  be  divided  on  the  basis 
of  the  percentages  actually  carried  during  the  previous 
period  of  competition.  Sometimes  the  railroad  which  is 
less  favorably  situated  has  to  make  concessions  in  rates  in 
order  to  secure  any  traffic  at  all.  In  this  case  it  is  allowed 
to  charge  a  lower  price  than  its  rivals,  and  receives  a  per- 
centage of  traffic  at  this  lower  rate.  Such  a  concession  is 
called  a  differential  rate  in  favor  of-  the  weaker  line,  and  is 
used  as  a  means  of  inducing  it  not  to  enter  into  cutthroat 
competition.  Sometimes,  instead  of  dividing  the  traffic, 
the  competing  concerns  may  divide  the  earnings  from  that 
traffic,  having  a  common  accounting  office  and  perhaps  a 
system  of  joint  agencies  connected  with  it. 

These  divisions  of  traffic  or  earnings  are  far  harder  to 
arrange  than  agreements  as  to  rates,  but,  when  once 
established,  they  are  much  more  effective.  For  when 
such  a  division  exists,  any  irregularities  of  the  agents  in 
the  matter  of  rates  hurt  the  company  which  they  repre- 
sent far  more  than  its  rivals.  This  arrangement,  there- 
fore, substitutes  mutual  confidence  for  mutual  suspicion. 

§  172.  Pools  have  not  been  regarded  with  favor  by  the 
law.'     In  the  United  States  they  are  treated  as  contracts 

'  In  England  the  legal  decisions  are  much  more  favorable  to  pools  than  in 
the  United  States  ;  while  in  most  parts  of  Continental  Europe  they  are  ac- 
cepted as  matters  of  course  ;  the  governments  themselves  entering  into  pool- 
ing contracts  with  private  companies  with  which  they  find  themselves 
brought  into  competition  in  the  management  of  state  railroads  or  other 
industrial  enterprises. 


158  COMBINATION  OF  CAPITAL. 

in  restraint  of  trade,  and  therefore  void  as  a  gambling  con- 
tract would  be  void.  The  courts  say  that  they  are  against 
public  policy  and  will  not  aid  in  their  enforcement. 

In  certain  kinds  of  business,  notably  railroad  transpor- 
tation, such  pools  or  combinations  are  treated  as  misde- 
meanors, and  attempts  are  made  to  punish  their  promoters 
by  fine  or  imprisonment.  But  these  efforts  to  do  away 
with  pools  have  conspicuously  failed  of  their  object- 
There  are  many  ways  of  evading  them.  A  joint  account- 
ing office  may  take  the  form  of  a  clearing  house  estab- 
lished for  the  convenience  of  the  public,  and  yet  may 
serve  all  the  purposes  of  a  pool.  If  competing  companies 
are  forbidden  to  divide  traffic  by  contract,  they  may 
secure  a  permanent  understanding  by  putting  a  majority 
of  their  stock  into  the  hands  of  a  common  board  of  trus- 
tees. Such  an  arrangement  is  known  as  a  trust.  The 
stockholders,  in  thus  putting  their  securities  in  trust,  part 
with  the  voting  power, — that  is  to  say,  the  power  of 
directing  the  policy  of  the  concern, — retaining  the  right 
to  receive  whatever  may  be  earned  on  their  stock,  while 
it  is  held  in  trust  by  a  board  that  secures  harmony  of 
management  between  the  different  companies  engaged. 
If  trusts  are  prohibited,  it  is  always  possible  to  resort  to 
actual  consolidation  ;  the  only  serious  difficulty  being 
that  a  large  consolidated  company  is  liable  to  be  taxed 
on  the  whole  of  its  capital  stock  in  a  number  of  different 
states.  It  was  this  difficulty  which  the  trust  agreement 
was  primarily  designed  to  evade.  As  tax  legislation  be- 
comes more  systematic,  the  trouble  from  this  source 
becomes  less,  and  the  possibility  of  consolidation  is 
decidedly  increased. 

§  173.  The  attempt  to  prohibit  combination  has  proved 
futile,  and  has  simply  driven  the  competing  concerns  into 
closer  consolidation.  Had  it  been  successful,  it  must 
either  have  retarded  the  development  of  modern  business 
and  the  utilization  of  modern  methods  requiring  concen- 


MISTAKES  OF  COMMERCIAL  POLICY.  1 59 

trated  management  of  capital,  or  it  must  have  subjected 
all  of  our  large  industries  to  constant  fluctuations  in  their 
scale  of  prices,  which  would  have  been  hardly  less  disas- 
trous to  the  consumer  than  to  the  investor. 

But  the  advantages  of  industrial  combination,  when  it 
comes  to  include  all  competitors,  are  frequently  balanced 
by  the  evils  of  commercial  combination.  The  economy 
connected  with  the  use  of  concentrated  capital  is  in  some 
measure  offset  by  the  loss  of  that  stimulus  which  compe- 
tition alone  seems  able  to  give ;  and  the  resulting 
rhonopoly  makes  it  uncertain  whether  the  consumers 
will  get  the  benefit  of  the  economy  which  is  actually  ob- 
tained. 

§  174.  If  a  monopoly  is  managed  by  inexperienced 
hands  the  effort  to  put  prices  up  is  usually  more  notice- 
able than  the  effort  to  put  expenses  down.  It  seems  so 
easy  to  make  a  profit  at  the  expense  of  society,  that  man- 
agers are  apt  to  neglect  the  more  laborious  method  of 
making  a  profit  by  service  to  society.  When  business 
men  have  been  all  their  lives  accustomed  to  face  imme- 
diate competition,  they  think  that  the  combination  of  all 
competitors  removes  the  only  effective  restriction  upon 
charges.  But  this  is  a  short-sighted  view  of  the  matter 
which  has  wrecked  most  of  the  enterprises  run  on  such  a 
basis,  and  has  made  the  average  trade  combination  a 
means  of  hindering  rather  that  helping  its  members. 

If  the  managers  of  a  combination  make  it  their  chief 
concern  to  suppress  competition  rather  than  to  realize 
economies  in  production,  their  policy  toward  trade 
rivals  results  in  violation  of  commercial  morality,  if 
not  of  commercial  law.  Not  content  with  obtaining 
unfair  advantages  in  the  way  of  discriminating  rates 
for  transportation  of  its  goods,  the  combination  tries 
to  exclude  its  rivals  from  their  accustomed  markets  by 
methods  of  boycotting  and  intimidation,  which,  when 
they  are  used  by  trades-unions,  provoke  fierce  denuncia- 


l6o  COMBINATION   OF  CAPITAL, 

tion  from  the  same  men  who  have  been  ready  to  practise 
them  for  their  own  advantage.' 

Even  among  those  combinations  which,  Hke  the  Stand- 
ard Oil  Company,  have  reahzed  economies  and  reduced 
rates  for  their  product,  this  unscrupulous  policy  toward 
competitors  has  been  carried  to  such  an  extent  as  to 
create  a  just  prejudice  against  them  ;  a  prejudice  which  is 
enough  to  explain,  and  in  one  sense  to  justify,  the  ten- 
dency on  the  part  of  the  public  to  ignore  or  depreciate 
the  industrial  services  which  they  have  actually  rendered. 

§  175.  There  is  one  case,  and  one  only,  where  'a 
monopoly  has  almost  unlimited  power  to  make  high 
charges.  If  a  number  of  contracts  must  be  fulfilled 
within  a  specified  time,  a  combination  which  controls  the 
matter  which  is  made  the  subject  of  these  contracts  can 
fix  prices  to  suit  itself,  limited  only  by  the  danger  of 
driving  the  contracting  parties  into  bankruptcy." 

If  operators  have  sold  for  future  delivery  stock  which 
they  did  not  own,  or  have  contracted  to  deliver  wheat 
during  a  certain  month  without  assuring  themselves  of 
their  sources  of  supply,  the  owners  of  the  stock  or  of  the 
wheat  can,  by  a  sufficiently  extensive  combination,  force 
the  operators  to  pay  what  price  they  please.  Such  a 
combination  is  known  as  a  corner.  Its  managers  have 
a  great  advantage  in  not  being  compelled  to  control  the 
supply  for  more  than  a  limited  period,  and  of  being 
assured  of  a  fixed  demand  during  that  time.  But  the 
number  of  successful  corners  is  less  than  is  commonly 
supposed.  Though  the  apparent  profits  of  such  an  oper- 
ation are  often  large,  the  expenses  of  securing  control  of 
the  whole  supply,  and  the  difficulty  of  selling  it  to  advan- 

'  It  is  interesting  to  see  how  combinations  of  capital  and  combinations  of 
labor  are  subject  to  the  same  possibilities  of  abuse  or  mismanagement  ;  and 
how  the  same  violation  of  commercial  right  looks  excusable  to  the  party 
benefited,  but  monstrous  to  the  party  injured. 

*  Or  by  special  rules  of  particular  exchanges  framed  to  avoid  such  a 
result. 


XEASONS  FOR  REDUCING  RATES.  l6l 

tage  upon  the  expiration  of  the  corner,  make  the  real 
gains  less  than  the  apparent  ones. 

§  176.  If  the  article  is  to  be  sold  to  consumers  instead 
of  to  speculators  who  have  made  fixed  contracts,  the 
chance  for  financial  success  by  a  policy  of  exorbitant 
prices  is  very  small  indeed.  We  have  seen  in  chapter  iii 
that  the  demand  for  an  article  falls  as  the  pVice  rises.  In 
the  case  of  almost  everything  except  necessary  food  sup- 
plies, this  fall  in  demand  is  very  rapid,  so  that  the  gross 
receipts  of  the  sellers  under  a  high  charge  are  less  than 
those  which  they  obtain  with  the  lower  scale  of  prices. 
Under  these  circumstances  the  maximum  gross  income  is 
obtained  by  making  rates  low  enough  to  develop  a  good 
volume  of  trafific,  instead  of  by  raising  them  so  high  as  to 
reduce  that  traffic  to  a  small  amount.  If  a  concern  uses 
a  large  amount  of  fixed  capital,  it  will  rarely  happen  that 
the  most  money  can  be  made  by  a  policy  of  high  charges 
with  small  volume  of  business.  Experience  has  shown 
that  the  opposite  method  is  the  one  which  has  proved 
permanently  profitable,  even  to  the  concerns  whose  mo- 
nopoly seemed  most  assured.  It  pays  in  the  long  run 
to  bring  rates  down  very  near  to  the  limits  of  actual  cost, 
if  such  reductions  are  folloVed  by  a  large  development, 
of  traffic. 

§  177.  Where  a  monopoly  is  of  such  precarious  charac- 
ter that  it  may  be  subjected  to  direct  competition  at 
almost  any  moment,  this  truth  is  sufficiently  obvious.  If 
a  concern  in  this  situation  attempts  fo  do  a  small  busi- 
ness at  high  rates  and  make  large  temporary  profits  by 
such  a  policy,  new  capital  will  come  into  the  business  in 
the  hope  of  securing  the  good-will  and  custom  of  the 
community  by  lower  rates.  High  charges  invite  dupli- 
cation of  plant  in  all  cases  where  such  duplication  is  pos- 
sible. If,  on  the  other  hand,  the  original  concern  adopts 
a  policy  of  doing  a  large  business  at  low  rates,  the 
promoters  of  a  rival  enterprise  will  soon  see  that  they 


l62  COMBINATION  OF  CAPITAL, 

cannot  hope  either  to  do  the  business  cheaper,  or  to  make 
a  satisfactory  profit  on  that  moderate  fraction  of  the 
existing  business  which  it  is  possible  for  a  new  competitor 
to  secure  without  special  concessions  in  rates. 

§  178.  Even  where  a  monopoly  does  not  fear  direct 
competition,  there  are  many  cases  where  it  is  subjected 
to  similar  restraints  in  an  indirect  manner.  If  there 
is  but  one  railroad  in  a  certain  section  of  country,  and 
this  has  a  monopoly  of  available  routes  for  reaching  the 
market  which  the  producers  of  the  district  naturally  seek, 
the  shippers  are  apparently  at  the  mercy  of  that  company 
and  its  agents.  But  if  there  is  another  railroad  line 
which  supplies  the  same  market  with  goods  from  another 
section,  it  is  all  but  inevitable  that  the  competition  of  the 
two  districts  with  one  another  should  regulate  the  price 
which  the  railroads  can  charge.'  We  cannot  have  two 
different  prices  for  similar  goods  in  the  same  market.  If 
the  supply  and  demand  of  wheat  at  Liverpool  fixes  the 
price  of  wheat  in  the  Liverpool  market  at  a  certain  rate 
per  bushel,  the  railroad  and  steamship  lines  in  every 
direction  must  make  their  charges  such  that  the  wheat 
producers,  in  the  sections  which  they  can  serve,  can  ship 
their  supplies  at  a  profit.  Some  of  the  transportation 
agents  may  disregard  this  necessity  for  a  year  or  two,  but 
not  permanently.  The  penalty  for  such  disregard  is  the 
destruction  of  the  trafific  on  which  the  transportation 
route  makes  its  living.  The  railroads  of  the  United  States, 
of  Russia,  and  of  British  India  feel  one  another's  com- 
petition in  determining  the  prices  which  they  can  charge 
on  their  international  trafific. 

§  179.  There  are  a  few  cases  where  the  monopoly  of 
the  sources  of  supply  is  so  complete  that  even  this  possi- 

'  When  permanent  monopoly  rights  are  guaranteed  by  law  in  all  the 
competing  districts,  as  on  French  railroads,  we  are  apt  to  find  a  system  of 
high  charges  which  no  nominal  powers  of  public  supervision  prove  adequate 
to  control. 


LARGE  CONSUMPTION  INDISPENSABLE.  1 63 

bility  of  indirect  competition  is  absent.  A  private  com- 
pany may  thus  control  all  the  available  water  within 
reach  of  a  large  city.  A  great  industrial  combination  like 
the  Standard  Oil  Company  may  become  the  sole  means 
of  supplying  certain  grades  of  oil  to  the  United  States, 
or  even  to  the  world.  Here  it  might  seem  as  though  the 
power  to  make  high  charges  were  absolutely  unlimited. 
Yet,  even  in  these  cases,  the  self-interest  of  the  producers 
dictates  the  adoption  of  a  relatively  low  scale  of  prices. 
Such  monopolies  can,  as  a  rule,  only  be  secured  by  very 
large  investments  of  capital.  Adequate  profit  on  these 
investments  involves  correspondingly  large  public  con- 
sumption. A  man  whose  facilities  are  so  rude  that  he 
makes  only  a  few  articles  in  the  course  of  a  year  and  sup- 
plies but  a  small  part  of  the  public  demand,  is  interested 
in  having  the  price  of  those  articles  as  high  as  possible. 
But  the  man  who  makes  a  great  many  articles  in  the 
course  of  a  year  and  meets  a  large  part  of  the  public  de- 
mand is  primarily  interested,  not  in  getting  a  maximum 
price  for  a  few  things,  but  in  getting  the  public  to  take  a 
great  many  things.  Among  those  trusts  and  other  Com- 
binations that  have  had  apparently  a  complete  monopoly, 
a  large  number  have  made  conspicuous  failures,  simply 
because  they  thought  of  high  prices  rather  than  large 
sales,  and  did  not  see  that  such  a  policy  was  suicidal. 

§  180.  Perhaps  the  most  striking  illustration  of  this 
truth  is  furnished  by  the  history  of  the  French  copper 
syndicate  of  1888.  By  a  series  of  brilliant  financial  opera- 
tions, this  syndicate  obtained  control  of  the  copper  pro- 
duct of  all  the  best  mines  of  the  world.  It  attempted  to 
raise  the  price  of  copper  from  nine  cents  a  pound  to  six- 
teen cents.  Everything  was  apparently  favorable  to  the 
success  of  these  operations.  Copper  was  a  necessity  for 
use  in  the  arts  ;  the  sources  of  supply  where  copper  could 
be  produced  cheaply  were  few  in  number,  and  the  syndi- 
cate had  exclusive  contracts  with  them  all.     The  demand 


164  COMBINATION  OF  CAPITAL. 

for  copper  was  constantly  tending  to  increase,  owing  to 
the  new  uses  of  electricity.  The  syndicate  itself  had  very 
large  capital,  and  was  supported  by  many  of  the  strongest 
financial  houses  of  Europe.  Yet  with  all  these  things  in 
its  favor  it  failed  disastrously,  because  the  consumption  of 
copper  at  the  advanced  prices  shrunk  to  such  a  degree 
that  all  the  calculations  of  the  syndicate  were  deranged 
and  its  financial  resources  put  to  a  strain  which  they 
could  not  stand.  Even  the  strongest  of  monopolies  must 
make  its  price  low  enough  to  cause  the  public  to  buy 
its  goods  or  services  to  a  sufficient  extent  to  utilize  its 
capital,  and  this  price  will  usually  be  found  to  be  nearly 
the  same  as  that  which  would  have  been  fixed  by  free 
competition. 

§  181.  If  a  large  industrial  combination  uses  the  advan- 
tages given  by  concentration  of  capital  to  render  labor 
more  efficient  and  obtain  a  good  profit  at  low  rates,  it 
has  excellent  chances  of  success.  But  if  it  makes  such 
economy  of  labor  a  pretext  instead  of  an  object,  and  uses 
its  monopoly  to  put  prices  up,  the  danger  of  failure  is 
wholly  disproportionate  to  the  chances  of  success.  Such 
a  policy  may  succeed  for  a  few  years,  but  sooner  or  later 
it  seems  bound  to  ruin  those  who  adopt  it. 

Can  we  trust  the  managers  of  our  large  industrial  enter- 
prises to  see  this  for  themselves  ?  Can  we  treat  their 
mistakes  as  a  self-correcting  evil,  and  wait  quietly  for  the 
time  when  they  shall  learn  that  their  own  permanent  in- 
terests are  best  served  by  doing  good  public  service  ?  To 
this  question  it  is  impossible  to  return  a  general  answer. 
Our  decision  in  any  particular  case  will  depend  partly 
upon  the  character  of  the  business  involved,  partly  upon 
the  intelligence  of  those  who  manage  it,  and  most  of  all, 
perhaps,  on  our  own  habits  of  mind. 

§  182.  If  we  are  in  the  habit  of  looking  at  direct  con- 
sequences, and  disregarding  indirect  ones,  we  shall  see 
grounds  for  active  public  interference  in  almost  all  cases 


DIFFERENT   VIEWS  OF  STATE   CONTROL.  1 65 

of  industrial  combination.  The  managers  of  a  monopoly 
have  it  in  their  power  to  do  a  great  deal  of  harm  before 
they  begin  to  feel  the  loss  to  themselves  which  arises 
from  the  adoption  of  a  short-sighted  policy.  Even  if  the 
trouble  corrects  itself  in  the  long  run,  a  great  many  legiti- 
mate interests  are  sacrificed  in  the  process.  A  railroad 
ultimately  finds  it  suicidal  to  kill  the  local  shippers  who 
are  its  best  permanent  customers ;  but  it  is  small  comfort 
to  the  shippers  to  know  that  their  deaths  are  to  be  slowly 
avenged  by  the  operation  of  economic  laws.  The  ship- 
pers demand  some  immediate  control  over  the  railroad 
agent  ;  something  which  will  prevent  the  evil  in  the 
beginning,  instead  of  simply  sufficing  to  prevent  its  in- 
definite repetition.  They  will  be  prone  to  adopt  the 
socialistic  solution  of  the  problem,  and  insist  that  the 
government  should  own  the  railroad,  as  the  surest  means 
of  avoiding  such  abuses. 

But  the  man  who  is  in  the  habit  of* looking  at  indirect 
consequences  will  see  that  the  undiscriminating  attempt 
to  prevent  evil  often  results  in  preventing  an  even  greater 
amount  of  good.  He  will  be  prone  to  take  the  individu- 
alistic view  of  the  matter.  He  will  be  disinclined,  except 
as  a  last  resort,  to  put  the  business  into  the  hands  of  a 
government  whose  agents  are  almost  always  chosen  on 
other  grounds  than  those  of  industrial  efficiency,  and 
whose  methods  are  much  less  flexible  than  those  of  a  pri- 
vate corporation.  He  will  be  indisposed  to  see  stringent 
regulations  put  in  force  until  he  is  convinced  that  milder 
remedies  are  inadequate  to  protect  the  interests  of  the 
public  as  a  whole. 

§  183.  The  industrial  and  political  conditions  which  de- 
termine whether  the  conduct  of  a  business  may  advan- 
tageously be  entrusted  to  the  government  instead  of 
being  delegated  to  the  property  owners,  are  discussed  at 
length  in  chapter  xii.  We  have  here  to  consider  the 
merits  of  various  methods  of  regulation  of  such  Indus- 


1 66  COMBINATION  OF  CAPITAL. 

tries,  where  government  ownership  proves  undesirable 
or  impracticable.  These  may  be  grouped  under  three 
heads  : 

1.  Limitation  of  profits. 

2.  Fixing  of  rates  by  public  authority. 

3.  Enforcement  of  far-sighted  methods  of  management. 
§  184.  The  first  of   these  methods  looks  much  better 

than  it  really  is.  It  is  a  favorite  remedy  with  people  who 
have  had  no  practical  experience  of  its  working.  They 
say  that  it  is  very  unjust  for  a  monopoly  to  obtain  a 
much  higher  dividend  than  would  be  possible  under  free 
competition  ;  and  they  think  that  if  we  limit  the  dividend 
we  shall  remove  the  motive  for  extortion.  In  practice 
the  matter  does  not  work  in  this  way.  Laws  limiting 
profits,  if  obeyed,  tend  to  keep  rates  high  instead  of  low; 
if  evaded,  they  substitute  a  crooked  method  of  distribution 
for  a  straight  one. 

If  a  company  is' selling  gas  at  $1.50  a  thousand  feet, 
it  indicates  that  this  is  the  price  which  furnishes  the 
maximum  profit.  A  higher  rate  would  lessen  this  profit 
by  limiting  consumption  ;  a  lower  rate  would  lessen  it  by 
making  the  margin  above  expenses  too  narrow.  If  the 
cost  of  making  the  gas  is  $1.00  a  thousand  feet,  and  the 
consumption  will  be  10,000,000  at  $1.75,  20,000,000  at 
$1.50,  and  30,000,000  at  $1.25,  the  profit  at  $1.75  would 
be  $7,500,  at  $1.50  it  would  be  $10,000,  and  at  $1.25 
it  would  be  $7,500.  If  the  company  were  forbidden 
to  divide  $10,000  the  price  would  be  quite  as  likely 
to  be  kept  up  at  $1.75  as  to  be  reduced  to  $1.25.  In 
fact,  the  higher  figure  would  be  very  much  the  more 
probable  one ;  first,  because  it  is  on  the  whole  easier 
for  the  officials  of  a  company  to  handle  a  small  business 
on  a  liberal  margin  of  profit  than  a  large  business  on  a 
close  one ;  and  second,  because  the  actual  rates  charged 
almost  always  represent  the  result  of  a  process  of  reduc- 
tion which  has  been  going  on  for  years,   for  the  very 


■  FUTILITY  OF  LIMITIXG  PROFITS.  167 

purpose  of  obtaining  a  maximum  profit.  If  our  large 
corporations  were  trying  to  raise  their  charges,  limitation 
of  profits  might  readily  remove  the  temptation  to  such  a 
policy.  But  this  is  not  what  they  are  habitually  doing. 
They  are  lowering  their  charges  for  the  sake  of  possible 
profits.  Take  away  the  chance  for  increased  profit  and 
we  destroy  the  motive  for  reductions  in  charge.  We  in- 
vite corporations  to  pursue  a  conservative  policy  when  a 
progressive  one  means  better  public  service  at  cheaper 
rates. 

Lord  Farrer,  whose  long  experience  as  secretary  of  the 
Board  of  Trade  gave  him  unique  opportunities  for  observ- 
ing the  effects  of  various  methods  of  regulation  practised 
in  England,  says  that  limitation  of  profits  does  not  cause 
reduction  in  rates ;  and  that  in  trying  to  apply  this  prin- 
ciple Parliament  has  gone  on  a  wrong  tack  and  involved 
the  country  in  a  "  maze  of  absurdities." 

§  185.  Besides  hindering  reductions*  of  rates,  limitation 
of  profits  also  prevents  the  increased  investment  of  capital 
which  is  the  best  guarantee  of  efificient  public  service.  If  it 
is  impossible  for  a  concern  to  make  more  than  an  ordinary 
rate  of  profit,  there  is  no  adequate  motive  offered  to  the 
investor  to  develop  new  facilities  and  introduce  new 
methods.  These  experiments  may  turn  out  badly  and 
involve  loss.  If  the  company  is  to  be  deprived  of  the 
special  profit  in  case  they  turn  out  well,  the  motive  for 
their  introduction  is  taken  away,  and  the  public  fails  to 
secure  the  service  which  it  might  otherwise  enjoy. 

§  186.  If  laws  limiting  profits  are  evaded  instead  of 
being  obeyed,  the  effects,  though  different  in  kind,  are 
equally  undesirable.  It  is  easy  to  reduce  profits  by  ex- 
travagance in  management,  or  by  giving  officials  large 
salaries.  This  does  no  good  to  the  consumer,  and  posi- 
tive harm  to  the  investor.  Such  laws  may  also  be  evaded 
by  inflating  the  company's  capital  account :  a  practice 
known  as  stock-watering.     If  a  corporation  is  allowed  to 


1 68  COMBINATION  OF  CAPITAL. 

divide  all  the  money  that  it  makes,  there  is  no  temptation 
to  honest  managers  to  create  a  fictitious  capital  account. 
But  if  the  dividends  are  arbitrarily  limited  to  eight  per 
cent  when  the  company  is  really  earning  twelve,  the 
directors  are  tempted  to  pretend  that  there  has  been  an 
investment  of  capital  one  and  one  half  times  as  great  as 
has  actually  been  expended.  On  the  basis  of  this  sup- 
posed investment  they  issue  a  stock  dividend  of  fifty  per 
cent.  This  is  in  common  language,  "  water."  It  does  not 
represent  money  actually  paid  in.  By  dividing  eight  per 
cent  on  the  watered  stock,  they  can  put  the  real  earnings 
of  the  company  into  the  hands  of  the  investors  without 
direct  conflict  with  the  law,  and  sometimes  without  public 
knowledge  of  the  actual  nature  of  the  transaction. 

The  worst  of  the  matter  is  that  when  the  practice  of 
stock-watering  once  becomes  tolerated,  it  is  indefinitely 
abused  by  those  who  are  in  a  position  to  do  so.  If  com- 
panies begin  to  issue  fictitious  capital,  there  is  no  limit  to 
such  issues.  A  false  capital  account  gives  opportunity 
for  every  kind  of  stock-speculation  and  for  all  sorts  of 
illegitimate  methods  of  control  by  financial  operators. 
Many  attempts  have  been  made  to  prohibit  stock-water- 
ing; but  as  long  as  limitation  of  profits  is  attempted, 
there  are  enough  honest  men  who  are  interested  in  the 
more  defensible  forms  of  stock-watering  to  render  it 
almost  impossible  to  detect  and  punish  the  indefensible 
ones.  The  evil  from  this  source  alone  far  outweighs  any 
good  that  has  ever  been  obtained  by  trying  to  limit  divi- 
dends.' 

§  187.  By  limiting  rates  instead  of  profits  we  have  a 
somewhat  more  effective  means  of  control.     It  has  the 

'  Some  charters,  especially  in  England,  try  to  combine  limitation  of  profits 
with  limitation  of  rates  by  providing  that  whenever  the  profit  exceeds  a 
specified  percentage,  the  charges  for  services  shall  be  correspondingly  re- 
duced. Others  (like  those  of  the  French  railroads)  provide  that  all  dividends 
above  a  certain  figure  shall  be  shared  with  the  government.  Neither  of 
these  systems  has  won  its  way  into  general  recognition. 


DIFFICULTY  IN  ESTIMATING   COST.  1 69 

merit  of  aiming  at  the  right  target,  whether  it  hits  it  or 
not.  Its  chief  difficulties  are  connected  with  the  com- 
plexity of  the  conditions  affecting  modern  traffic.  It  is 
seldom  possible  to  say  what  any  specific  piece  of  work  really 
costs  a  large  concern.  The  cost  depends  upon  the  amount 
of  work  done.  The  larger  the  investment  of  capital,  the 
more  complete  is  this  dependence  of  cost  upon  quantity. 
Under  the  old  system  of  hand  labor  it  was  possible  to 
know  with  approximate  accuracy  the  cost  of  a  single  pair 
of  boots.  It  could  be  estimated  by  finding  the  commer- 
cial price  of  the  material,  and  the  time  involved  in  sewing 
the  boots.  But  under  the  modern  system,  when  the  boots 
are  produced  in  a  large  factory,  it  is  impossible  to  tell  how 
much  they  cost,  unless  we  know  how  many  pairs  the  owners 
of  that  factory  sell  in  the  course  of  a  year.  If  the  annual 
charges  of  the  factory  for  interest  and  maintenance  are 
$io,ocx)  a  year,  and  10,000  pairs  of  boots  are  manufac- 
tured in  that  time,  every  pair  costs  $[  over  and  above  the 
price  of  the  labor  and  materials  involved.  But  if  only 
5,000  pairs  of  boots  are  made,  the  proper  charge  under 
this  head  is  $2  a  pair  ;  while  if  20,000  pairs  are  made,  the 
charge  may  be  reduced  to  50  cents  a  pair.  In  fact,  the 
chief  means  which  a  manufacturer  possesses  for  reducing 
cost  is  to  increase  the  number  of  his  sales  so  as  to  make 
it  possible  to  lower  this  item  of  expense.  This  is  the 
really  critical  element  in  price  determination  in  all  cases 
where  large  amounts  of  capital  are  involved  ;  and  it  is 
precisely  this  which  public  authorities  are  unable  to  de- 
termine in  advance,  because  it  is  essentially  speculative 
in  its  character.  Of  course,  the  business  men  themselves 
have  the  same  difficulty  ;  but  they  are  experimenting  with 
their  own  capital,  at  their  own  risk,  and  in  lines  where 
they  have  the  maximum  technical  knowledge  ;  while  the 
government  authorities,  dealing  with  the  capital  of  others 
and  the  results  of  others'  experience,  find  themselves 
sorely  perplexed. 


I/O  COMBINATION  OF  CAPITAL. 

§  1 88.  Among  industrial  monopolies,  the  case  where 
these  difficulties  are  least  is  probably  that  of  water  com- 
panies. The  capital  invested  is  known  with  a  fair  degree 
of  accuracy.  If  the  engineering  work  has  been  properly 
performed  at  the  outset,  it  is  comparatively  easy  to  decide 
on  the  amount  of  annual  repairs  required.  The  water 
consumption  can  be  predicted  on  the  basis  of  population 
served.  In  the  case  of  gas  works  the  matter  is  rather 
more  complicated.  Fluctuations  in  the  cost  and  quality 
of  coal  make  a  great  difference  in  profits.  New  processes 
may  be  invented  which  will  either  increase  possible  econ- 
omy, or  render  a  part  of  the  old  investment  valueless. 
Other  methods  of  lighting  may  conceivably  be  introduced, 
which  will  so  far  lessen  the  demand  for  gas  as  to  deprive 
the  shareholders  of  a  large  part  of  the  permanent  value 
of  their  property.  In  order  to  know  the  real  profit  we 
must  deduct  from  the  apparent  profit  a  considerable  sum 
to  allow  for  the  depreciation  of  the  fixed  capital ;  a  sum 
which  in  cases  like  this  is  not  calculable  with  certainty. 
Under  such  circumstances  the  whole  business  becomes 
more  speculative,  and  the  possibility  of  prescribing  fair 
rates  less  satisfactory. 

§  189.  These  difficulties  are  yet  more  conspicuous  in 
the  matter  of  electric  lighting,  and  in  fact  in  all  the  com- 
mercial applications  of  electricity.  With  the  possible  ex- 
ception of  the  telegraph,  there  is  no  electrical  industry  in 
which  we  have  even  an  approximate  means  of  estimating 
the  real  profits  from  year  to  year.  We  have  not  had  long 
enough  experience  to  know  what  is  a  proper  allowance  to 
be  made  for  depreciation.  In  some  cases — notably  that 
of  the  telephone — we  do  not  as  yet  know  the  proper  basis 
for  the  arrangement  of  charges.  Shall  telephone  charges 
be  based  on  the  message,  as  in  long-distance  business,  or 
on  the  instrument,  as  in  the  ordinary  local  business?  The 
former  is  the  more  logical  basis,  but  it  involves  decided 
difficulties.      The  public,  in  local  telephone  exchanges, 


APPORTIONMENT  OF  EXPENSES.  171 

distinctly  prefers  the  latter  method.  But  if  a  company 
charges  by  the  instrument  and  not  by  the  message,  we  are 
brought  face  to  face  with  the  remarkable  fact  that  the  ex- 
penses per  unit  increase  with  an  increase  in  the  volume  of 
business  done.  In  a  town  with  only  100  telephones  in 
operation,  the  expense  to  the  company  per  instrument  and 
the  rate  which  can  be  profitably  charged  is  far  less  than 
in  a  city  with  1000  instruments.  In  the  one  case,  it  need 
only  be  prepared  to  make  ninety-nine  connections  for  each 
subscriber  ;  in  the  other,  it  must  arrange  for  nine  hundred 
and  ninety-nine.  This  will  serve  to  illustrate  the  highly 
experimental  character  of  the  problem  ©f  rate-making  in 
the  newer  forms  of  industry.  It  is  diflficult  enough  for 
the  investors  to  find  agents  who  can  be  trusted  to  experi- 
ment with  property  under  these  conditions.  Still  more 
diffcult  is  it  to  find  public  officials  who  can  be  trusted  to 
experiment  with  other  people's  property. 

§  190.  It  is  in  transportation  service  that  the  regulation 
of  charges  is  most  perplexing,  because  transportation 
agencies  do  a  great  many  different  kinds  of  work,  and  no 
rule  has  been  found  to  decide  how  much  of  the  expense 
of  maintenance  and  interest  may  justly  be  charged  to  one 
kind  rather  than  to  another  (§101).  A  railroad  carries  both 
freight  and  passengers.  How  are  we  to  decide  how  large 
a  part  of  the  expense  of  maintaining  the  road  in  efficient 
condition  shall  be  charged  to  passengers,  and  how  much 
to  freight  ?  If  we  attempt  to  apportion  these  charges  on 
the  basis  of  the  number  of  trains  of  each  class,  we  seem  at 
first  sight  to  obtain  a  fair  basis  of  distribution.  But  if  we 
make  passenger  rates  high  enough  to  pay  their  share  of 
the  general  expenses  of  the  road  on  this  basis,  it  may 
happen  that  a  great  deal  of  passenger  traffic  will  be  lost. 
In  that  case  such  an  adjustment  of  charges,  however  great 
the  apparent  equity,  will  hurt  the  road,  the  travellers  who 
live  on  its  line,  and  even  the  shippers  of  freight  them- 
selves ;  for  if  passenger  rates  kill  passenger  traffic,  trans- 


1/2  COMBINATION  OF  CAPITAL. 

portation  can  only  be  had  when  the  shippers  of  freight  are 
prepared  to.  bear  the  whole  expense  of  maintaining  the 
line  instead  of  a  part  only.  There  is  the  same  difficulty 
in  making  the  further  apportionment  of  charges  between 
short-distance  and  long-distance  traffic  of  the  same  kind, 
or  between  different  consignments  of  freight  that  have  the 
same  weight  but  different  commercial  value.' 

§  191.  A  private  company  solves  the  problem  of  appor- 
tionment by  charging  what  the  traffic  will  bear.  If  the 
maximum  revenue  can  be  obtained  by  fixing  a  high  rate 
on  cloth  and  a  low  rate  on  coal,  the  company  adopts 
this  policy.  It  argues,  with  much  justice,  that  its  own 
interests  in  this  matter  are  substantially  identical  with 
those  of  the  public.  If  cloth  gives  the  maximum  revenue 
at  high  rates,  it  shows  that  such  rates  do  not  burden  the 
traffic.  If  coal  gives  the  largest  net  revenue  under  a 
schedule  which  allows  the  company  very  little  profit  per 
ton,  but  very  large  tonnage,  it  shows  that  a  low  coal  rate 
is  needed  in  order  to  meet  the  public  requirements. 
Rates  are  based  on  value  of  service  not  only  in  the  tariffs 
of  well  managed  private  companies  but  in  all  effective 
schemes  of  public  regulation.  A  turnpike  company  has 
been  allowed  to  charge  a  pleasure  wagon  more  than  a 
freight  wagon,  not  because  the  former  involves  greater 
cost  of  maintenance  to  the  turnpike  company,  but  because 
it  could  be  compelled  to  pay  more  without  destroying 
travel.     But  a  public  official  has  not  at  command  the 

*  The  proposal  to  solve  this  difficulty  by  leaving  diflFerent  carriers  free  to 
run  their  trains  over  the  track  of  any  railroad  company,  if  they  will  pay 
tolls  to  cover  the  interest  and  maintenance  of  the  capital  invested  in  the 
roadbed,  ignores  the  chief  difficulty  of  the  case.  The  perplexing  problems 
about  regulation  of  rates  would  be  felt  in  the  apportionment  of  tolls.  The 
assumption  that  the  matter  of  tolls  for  the  use  of  the  track  will  be  simple 
and  can  be  easily  dealt  with,  if  separated  from  loading  and  movement  ex- 
penses, is  quite  unwarranted.  It  is  just  because  of  the  difficulty  connected 
with  compensation  for  interest  and  maintenance  of  permanent  way  that  a 
railroad  problem  exists  at  all. 


REGULATION  OF  RATES,  1 73 

means  which  a  railroad  agent  can  use  in  order  to  decide 
what  the  traffic  will  really  bear.  The  agent  can  try  ex- 
periments and  see  whether  the  column  of  business  grows 
enough  to  justify  reductions  of  rates.  The  legislature  or 
commission  can  only  guess  at  such  a  result  in  advance, 
without  the  chance  of  feeling  its  way  by  experiment.' 

§  192.  Of  the  means  of  transportation  now  controlled 
by  private  companies,  street  railroads  offer  the  fewest 
difficulties  to  the  legislator.  Their  rates  of  fare  are 
almost  always  regulated  either  by  custom  or  by  law. 
This  can  usually  be  done  without  much  injustice.  If 
rates  are  fixed  so  low  as  to  be  unprofitable,  the  company 
can  crowd  its  cars  a  little  more.  By  putting  enough 
persons  on  a  car  at  almost  any  rate,  however  low,  it  is  pos- 
sible to  meet  the  running  expenses  of  that  car,  and  the 
fixed  charges  attaching  to  the  track  as  a  whole  are  com- 
paratively slight,  because  the  city,  in  the  great  majority 
of  instances,  has  given  the  right  of  way  for  nothing. 
Even  in  cable,  electric,  or  elevated  railroads,  the  condi- 
tions of  traffic  are  far  simpler  than  in  a  steam  rail- 
road -built  for  general  purposes ;  the  chief  difficulty 
of  fixing  rates  in  all  these  cases   being  connected   with 

'  The  price  charged  by  a  railroad  for  any  service  really  consists  of  two 
parts — a  fee  and  a  tax.  The  former  covers  the  direct  or  immediate  expense 
of  doing  the  particular  service  in  question — expenses  of  billing,  loading, 
hauling,  etc.  The  latter  contributes  to  the  general  expenses  attaching  to 
the  road  itself  as  a  mass  of  fixed  capital — interest,  maintenance,  and  other 
costs  which  are  not  greatly  affected  by  additions  to  the  volume  of  business 
done.  The  railroad  agent  endeavors  to  make  the  aggregate  amount  of  these 
contributions  to  the  general  expenses  as  large  as  possible  ;  for  any  excess  of 
this  total  above  such  expenses  constitutes  the  net  profit  of  the  road.  If  a 
reduction  in  rates  increases  gross  earnings  faster  than  it  increases  expenses, 
it  shows  that  the  old  tax  was  too  high,  and  was  defeating  its  own  purpose  by 
destroying  traffic.  The  most  profitable  rate  on  any  class  of  goods  is  the  one 
where  the  product  obtained  by  multiplying  the  amount  of  traffic  secured  into 
the  profit  per  unit  of  traffic — i.  e.,  the  excess  of  price  received  above  direct 
expense — is  a  maximum.  The  same  rule  which  applies  to  railroad  rates  of 
course  holds  good  of  any  other  concern  which  has  a  monopoly  of  any  species 
of  traffic. 


174  COMBINATION  OF  CAPITAL. 

the  uncertainty  attaching  to  the  depreciation  account. 
(§  188.) 

§  193.  In  the  case  of  steam  raihoads,  the  theoretical 
difficulties  attaching  to  a  just  apportionment  of  rates  are 
almost  insuperable.  If  a  government  commission  wishes 
to  prescribe  a  schedule  of  rates,  it  must  find  what  system 
of  charge  is  adopted  on  other  roads  similarly  situated, 
and  whether  those  charges  pay  or  do  not  pay  a  fair  profit 
on  the  investment.  But  no  two  roads  are  just  alike,  and 
any  commission  is  liable  to  make  its  schedule  too  high  or 
too  low,  according  to  its  personal  bias.  In  countries  like 
England,  where  the  railroads  are  owned  at  home,  and 
where  their  promoters  have  great  influence  with  the  legis- 
lature, such  maxima  are  placed  so  high  as  to  be  inopera- 
tive. Where,  on  the  contrary,  a  large  part  of  the  railroad 
stock  is  owned  at  a  distance  from  the  road  itself,  the 
legislature  is  tempted  to  fix  the  maximum  rates  too  low 
and  to  leave  the  owners  no  opportunity  for  profitable 
work.  The  evil  resulting  from  the  latter  alternative  is 
worse  than  from  the  former.  It  was  seen  in  the  opera- 
tion of  the  Potter  law  in  Wisconsin  in  1874,  where  the 
maxima  were  placed  at  a  figure  that  prevented  the  roads 
from  earning  interest  or  even  maintenance.  They  were 
compelled  to  contract  their  service  to  such  a  degree  that 
the  development  of  the  state  was  checked,  and  after  two 
years'  trial  the  very  men  who  had  been  most  anxious  to 
pass  the  law  were  equally  pressing  in  favor  of  its  repeal. 
While  few  instances  of  railroad  legislation  have  had  as 
bad  an  effect  as  this,  the  temptation  to  exercise  a  short- 
sighted policy  is  always  present  when  the  legislature  feels 
the  urgent  pressure  of  shippers  for  a  reduction  in  rates 
and  does  not  feel  the  claims  of  absentee  owners  for  a  fair 
return  on  their  property. 

§  194.  Where  state  ownership  is  impracticable,  and 
private  enterprise  short-sighted  and  extortionate,  laws 
fixing  rates  may  be  the  best  available  resource  for  the 


WHAT   THE    TRAFFIC    WILL   BEAR.  175 

pi'otection  of  the  public  ;  but  their  operation  is  in  almost 
all  cases  rather  unsatisfactory;  They  subject  the  com- 
munity to  the  evils  resulting  from  inequality  of  supply 
and  demand,  as  described  in  chapter  iii ;  and  the  burden 
consequent  upon  these  evils  is  apt  to  outweigh  the  good 
actually  accomplished  by  the  statute. 

§  195.  Less  ambitious  in  their  aims,  but  more  successful 
in  their  practical  results,  have  been  the  attempts  to  secure 
fair  rates  by  insisting  on  far-sighted  management  in  the 
affairs  of  monopolies. 

It  cannot  be  too  often  repeated  that  it  is  not  so  much 
the  character  of  a  particular  industry  which  creates  an 
apparent  conflict  of  interests  between  the  investors  and 
the  public,  as  the  want  of  foresight  in  the  management  of 
that  industry.  The  principle  of  charging  what  the  traffic 
will  bear,  adopted  by  our  large  corporations,  is  a  good 
one ;  it  is  only  when  it  is  made  a  pretext  for  charging 
what  the  traffic  will  fiot  bear,  that  it  gives  rise  to  abuses. 
It  depends  largely  upon  the  intelligence  of  the  manage- 
ment whether  it  is  used  as  a  principle  or  abused  as  a 
pretence ;  and  intelligence  in  management  is  often  a 
matter  of  slow  growth.  In  the  Middle  Ages  people 
thought  it  necessary  to  regulate  by  public  authority  the 
rates  that  bakers  might  charge  for  their  services  in  making 
bread.  They  said  that  in  the  absence  of  such  regulation 
the  public  baker  had  the  rest  of  the  community  at  his 
mercy.  He  could  take  advantage  of  the  necessities  of 
his  customers  to  exact  starvation  prices.  We  have  passed 
beyond  this  industrial  stage.  Our  business  men  can  look 
a  week  or  a  month  ahead  ;  the  baker  can  see  that  other 
bakers  will  take  away  his  business  unless  he  is  guided  by 
considerations  of  public  policy.  But  we  have  not  learned 
to  look  ten  or  twenty  years  ahead.  The  managprs  of  our 
largest  enterprises  still  invite  competition  by  high  rates 
instead  of  forestalling  it  by  low  ones,  and  still  handicap 
their  best  customers  by  discrimination  instead  of  develop- 


176  COMBINATION   OF  CAPITAL. 

ing  their  trade  by  equality  of  charges.  The  newer  the 
industry,  the  greater  is  the  danger  of  unnecessary  conflicts 
between  producers  and  consumers,  and  the  need  of  apply- 
ing every  agency  to  quicken  public  intelligence. 

§  196.  The  power  of  the  government  may  be  so  exer- 
cised as  either  to  hasten  or  to  retard  this  educational 
process.  Attempts  to  prescribe  rates  have  a  tendency  to 
retard  it ;  and  this  is  probably  the  severest  positive  evil 
connected  with  them.  If,  as  so  often  happens,  the  results 
of  such  attempts  prove  unsatisfactory,  the  managers  will 
impute  all  their  own  shortcomings  to  the  existence  of  a 
control  which  hampers  them,  and  will  not  take  to  heart 
the  lessons  which  they  might  otherwise  learn  from  mis- 
takes. 

On  the  other  hand,  the  educational  process  may  be 
stimulated  by  measures  which  secure  greater  publicity 
in  the  affairs  of  monopolies.  Much  of  the  apparent  con- 
flict of  interest  between  producers  and  consumers  is  due 
to  misunderstanding  on  the  part  of  each  side  as  to  the 
real  needs  of  the  other.  This  misunderstanding  can  be 
lessened,  if  not  wholly  avoided,  by  clear  judicial  opinions. 
A  great  deal  of  the  influence  exercised  by  English  and 
American  courts  has  been  due  to  the  fact  that  they  placed 
economic  principles  before  both  sides  in  a  non-partisan 
version  and  in  an  absolutely  clear  light.  There  is  some 
danger  that  the  bench  will  lose  this  influence,  partly  be- 
cause of  the  increasing  complication  of  modern  industry, 
which  renders  it  difficult  for  a  lawyer  to  understand  the 
indirect  economic  effects  of  his  decisions  ;  partly  on  ac- 
count of  a  somewhat  dangerous  doctrine  of  sovereignty, 
which  is  leading  our  courts  to  lay  too  much  stress  on  pre- 
cedent and  statute  and  too  little  on  the  common  sense  of 
the  people.  The  authority  of  the  court  depends,  not  on 
the  acts  of  the  legislature,  not  even  on  uninterrupted  tra- 
dition, but  on  the  fact  that  it  knows  more  than  the  parties 
between  whom  it  is  deciding  and  can  see  the  consequences 


ADVISORY  COMMISSIONS.  lyj 

of  different  lines  of  action  more  clearly,  as  well  as  more 
impartially,  than  they  can. 

§  197.  To  meet  the  deficiency  of  technical  knowledge, 
recourse  is  often  had  to  special  commissions  of  experts 
for  impartial  investigation  of  disputes.  The  Massachu- 
setts Railroad  Commission  is  perhaps  the  best  known 
example  of  this  kind.  In  the  days  of  its  most  successful 
operation  it  had  practically  no  power  except  the  power 
to  report ;  but  its  reports  showed  such  a  clear  under- 
standing of  the  points  at  issue  that  they  were  accepted  as 
authority  by  impartial  men  on  both  sides.  The  Inter- 
state Commerce  Commission  was  in  some  respects  mod- 
elled upon  the  Massachusetts  commission,  and  such  success 
as  it  has  enjoyed  has  been  based  on  its  power  of  applying 
sound  economic  principles  to  difficult  cases.  It  is  true, 
though  it  sounds  paradoxical,  that  the  power  of  these 
commissions  is  lessened  by  increasing  their  powers. 
They  are  engaged  in  building  up  new  laws,  new  tradi- 
tions, and  new  methods  of  business  where  it  is  absolutely 
essential  that  their  reasoning  should  command  the  assent 
of  clear-headed  men  on  both  sides.  When  they  cease  to 
rely  on  their  reason  and  fall  back  on  authority,  they  lose 
the  educational  power  which  is  the  source  of  their  domi- 
nant influence. 

Another  useful  form  of  advisory  commission  is  com- 
posed of  local  business  men,  or  representatives  of  commer- 
cial and  industrial  organizations,  who  can  give  advice  as 
to  the  probable  effect  of  changes  in  rates.  Without  such 
advice  a  railroad  agent  (or  a  tariff  committee  composed 
exclusively  of  railroad  men)  is  in  danger  of  making  reduc- 
tions, not  where  they  are  most  needed,  but  where  they 
are  most  clamorously  called  for.  The  system  of  local 
advisory  boards  has  been  most  consistently  applied  in  the 
German  Empire  ;  and,  though  a  little  slow  in  its  operation, 
seems  to  have  much  to  recommend  it. 

§  198.  The  legislation  which  is  most  serviceable  in  giving 


178  COMBINATION  OF  CAPITAL. 

force  to  the  decisions  of  such  commissions  and  advisory 
boards  is  that  which  prescribes  publicity  of  rates.  The 
most  serious  evils  in  connection  with  arbitrary  manage- 
ment of  monopolies  have  taken  the  form,  not  of  attempts 
to  oppress  the  public  as  a  whole,  but  of  attempts  to  make 
differences  between  different  sections  of  the  public  and 
to  charge  the  poor  man  more  than  the  rich  man.  When 
these  differences  are  brought  prominently  before  the 
public  eye,  they  often  stop  of  themselves  ;  and  the  courts 
find  comparatively  little  difficulty  in  dealing  with  those 
which  persist.  It  may  at  times  seem  necessary  to  sup- 
plement these  provisions  with  special  statutes  to  secure 
equality,  such  as  the  "  long  and  short  haul  "  clause  of  the 
Interstate  Commerce  Act,  which  prohibits  railroad  com- 
panies from  charging  local  business  a  higher  aggregate 
rate  than  through  business  of  the  same  sort ;  but  the 
good  done  by  such  acts  is  usually  much  less  than  their 
promoters  have  anticipated.  Effective  control  must  be 
sought  in  the  application  of  general  legal  principles,  rather 
than  in  special  statutes. 

§  199.  Another  means  of  securing  far-sighted  manage- 
ment is  the  enforcement  of  directors  responsibility.  If 
those  who  are  engaged  in  the  actual  management  are 
striving  to  make  the  largest  immediate  income  out  of  a 
concern,  they  will  pursue  an  extremely  short-sighted 
policy,  destructive  alike  to  customers  and  to  investors. 
If,  on  the  other  hand,  their  interests  are  identified  with 
the  permanent  profits  of  the  company  instead  of  the 
temporary  ones,  they  will  be  almost  certain  to  do  well 
by  the  public.  Anything  which  so  increases  the  borrow- 
ing power  of  corporations  or  diminishes  the  liabilities  of 
directors  as  to  make  it  possible  for  them  to  speculate  with 
other  people's  money,  causes  short-sighted  and  unintelli- 
gent use  of  monopoly  powers.  Whatever  makes  the 
director  responsible  to  the  investor,  tends  to  make  the 
whole  corporation  serve  the  public  better  in  the  long  run. 


DIRECTORS'  RESPONSIBILITY.  179 

§  200.  If  the  managers  of  an  enterprise  are  allowed  to 
use  other  people's  money  while  they  risk  comparatively 
little  of  their  own,  a  number  of  serious  evils  will  inevitably 
follow.  They  will  persuade  the  public  to  engage  in 
enterprises  which  are  doomed  to  failure  in  advance,  in 
the  hope  that  they  may  themselves  make  a  temporary 
profit  out  of  their  management,  either  in  the  form  of 
large  salaries  or  of  lucrative  personal  contracts.  Or 
they  may  so  manipulate  the  finances  of  the  companies 
which  they  control,  as  to  make  a  personal  profit  out  of 
fluctuations  in  the  value  of  their  securities.  These  possi- 
bilities form  a  temptation  to  waste  the  investors'  private 
capital  and,  what  is  far  worse,  to  misuse  an  appreciable 
part  of  the  public  capital.  The  former  causes  loss  to  the 
individual  investors  directly  concerned  ;  the  latter  affects 
the  whole  community,  consumers  as  well  as  investors,  by 
preventing  the  national  resources  from  being  properly 
utilized.  This  danger  is  most  inadequately  met  in  the 
United  States.  There  are  few  localities  where  either  law 
or  public  sentiment  does  much  to  check  it.  In  this 
respect  America  is  far  behind  other  countries.  In  most 
parts  of  Europe,  these  evils  are  avoided  or  mitigated  by 
holding  the  promoters  of  new  concerns  responsible  for  the 
correctness  of  their  indications,  and  by  making  it  a  crime 
for  them  to  divert  the  money  of  investors  to  their  own 
uses  by  lucrative  private  contracts.  In  England  these 
laws  are  backed  by  a  public  sentiment  which  looks  on 
the  position  of  a  director  or  an  official  of  a  corporation 
as  one  of  trust,  and  which  unsparingly  condemns  every 
attempt  to  use  such  a  place  for  personal  aggrandizement 
at  the  expense  of  the  investor.  But  in  the  United 
States  the  legal  responsibility  is  inadequate,  and  the 
public  sentiment  even  more  so.  Perhaps  the  most  seri- 
ous among  all  the  evils  under  which  American  business 
suffers  is  the  lack  of  clear  understanding  as  to  directors' 
responsibility. 


CHAPTER  VII. 

MONEY. 

Its  Functions  and  Forms — Seigniorage — Depreciation — The  General  Level 
of  Prices — Conflicts  between  Debtor  and  Creditor — Bimetallism  in 
Theory  and  in  History — Irredeemable  Paper  Money. 

Of  the  abundant  literature  on  this  subject,  perhaps  the  best  short  work 
for  general  use  is  W.  S.  Jevons  :  "  Money  and  the  Mechanism  of  Exchange." 
4th  ed.  London  and  New  York,  1878.  This  may  be  supplemented  by 
H.  White:  "  Money  and  Banking."     Boston,  1895. 

The  general  theory  of  money  and  credit  is  admirably  developed  in  the 
third  book  of  John  Stuart  Mill's  "  Political  Economy." 

J.  L.  Laughlin,  "  History  of  Bimetallism  in  the  United  States,"  New 
York,  1886,  deals  with  the  subject  of  silver  coinage  from  the  monometallist 
standpoint.  The  best  presentation  of  the  bimetallist  argument  is  perhaps 
given  in  J.  S.  Nicholson  :  "A  Treatise  on  Money  and  Essays  on  Monetary 
Problems.     2d  ed.     London,  1893. 

The  annual  reports  of  the  U.  S.  Treasury  Department  furnish  much 
statistical  matter  which  is  of  great  value. 

§  201.  Nearly  all  business  contracts  and  agreements 
— sales,  leases,  wages,  loans,  insurance,  etc. —  call  for  pay- 
ments of  money  from  at  least  one  party.  Money  is  best 
defined  as  a  thing  which,  by  common  consent  of  the 
business  community,  is  used  as  a  basis  of  commercial 
obligations.  Whatever  may  be  chosen  for  this  purpose, 
becomes,  by  the  very  fact  of  being  thus  used,  a  convenient 
standard  for  measuring  private  wealth — a  value  denomi- 
nator, as  it  is  sometimes  called — by  means  of  which  the 
power  and  advantage  attaching  to  the  ownership  of  differ- 
ent kinds  of  saleable  property  can  be  compared. 

§  202.  There  are  two  quite  distinct  purposes  for  which 
-  180 


RESERVE  AND   CIRCULATION.  l8l 

supplies  of  money  are  needed  by  the  business  community 
and  its  individual  members. 

(i)  A  certain  amount  of  capital  must  be  held  in  this 
form  as  a  cash  reserve  to  secure  solvency. 

(2)  A  large  amount  of  income  may  be  received  in  this 
form  as  a  convenient  medium  of  exchange. 

The  latter  function  seems  at  first  sight  much  more 
important  than  the  former.  The  volume  of  transactions 
settled  by  payments  of  money  as  a  medium  of  exchange 
in  the  course  of  a  year  is  far  greater  than  the  whole 
amount  of  cash  reserve  in  existence  at  any  one  time.  In 
spite  of  this  disparity,  the  function  of  money  as  capital  is 
of  more  fundamental  consequence.  If  we  have  a  proper 
cash  reserve  of  money,  we  can  use  other  things  as  media 
of  exchange.  We  can  make  our  payments  by  bank 
checks  or  other  instruments  of  credit.  If  we  have  not  an 
adequate  reserve  of  capital  in  the  form  of  money,  no 
credit  or  banking  system,  however  well  devised,  will  act 
as  a  substitute.  The  individual  or  the  community  that 
wishes  to  do  a  successful  business  must  keep  an  adequate 
stock  of  cash — not  necessarily  as  a  means  of  payment, 
but  as  a  guarantee  of  solvency.  The  ease  with  which 
other  means  of  exchange  can  be  substituted  for  money, 
does  not  prove  that  money  is  unnecessary ;  it  proves  that 
its  function  as  a  means  of  exchange  is  not  the  sole  or 
even  the  principal  object  for  which  it  is  needed. 

§  203.  It  sometimes  happens  that  there  are  two  differ- 
ent standards  of  contract  in  common  use  at  the  same 
time.  In  that  case  we  really  have  two  independent  forms 
of  money  in  the  same  community.  It  may  be  that  one 
article  is  used  for  the  settlement  of  debts  and  other  long 
time  contracts  because  of  the  stability  in  the  conditions 
which  affect  its  supply  and  demand,  while  another  is  used 
for  sales  and  wages  because  of  its  superior  convenience  as 
a  means  of  exchange.  This  state  of  things  has  been  ex- 
emplified in  English  history  in  cases  where  rents  were 


1 82  "  MONEY. 

calculated  in  wheat '  or  in  days'  labor,  while  payments 
were  made  in  coin.  The  standards  which  served  as  units 
for  hiring  land,  were  absolutely  unavailable  as  a  means  of 
exchange  in  ordinary  life. 

A  basis  of  contracts  which  does  not  serve  as  a  medium 
of  exchange  is  known  as  money  of  account. 

§  204.  The  concurrent  use  of  different  kinds  of  money 
for  different  purposes  may  result  from  the  attempt  of  the 
government  to  force  the  nation  to  use  money  of  a  kind 
which  some  of  its  members  dislike  or  distrust.  This  state 
of  things  has  seemed  imminent  in  the  United  States,  when 
the  agitation  for  free  silver  coinage  has  been  most  active. 
A  large  number  of  the  more  permanent  contracts  have 
been  made  payable  specifically  in  gold.  If  silver  became 
the  medium  of  exchange  and  unit  of  reckoning  for  ordi- 
nary transactions,  we  should  see  the  concurrent  use  of 
two  different  kinds  of  money  side  by  side.  Such  a  state 
of  things  is  extremely  undesirable.  It  is  of  great  impor- 
tance to  the  commercial  world  that  the  money  which  a 
man  receives  for  the  goods  which  he  sells  should  be  avail- 
able for  the  settlement  of  debts ;  and  conversely  that  the 
money  which  the  creditor  receives  from  those  who  are 
indebted  to  him  should  be  serviceable  for  the  purchase  of 
current  supplies.' 

'  Adam  Smith  has  discussed  the  advantages  and  disadvantages  of  "  com 
rents."  In  the  long  run,  wheat  is  probably  a  more  equitable  standard  of 
payment  than  either  gold  or  silver,  because  the  number  of  people  tends  to 
adjust  itself  to  the  food  supply,  so  that  there  will  be  a  rough  correspondence 
between  the  value  of  a  bushel  of  wheat  and  that  of  a  day's  labor.  But  from 
year  to  year  wheat  fluctuates  more  than  gold  or  silver,  because  of  variations 
in  its  production,  and  still  more  because  of  the  absence  of  an  accumulated 
stock  large  enough  to  reduce  the  effect  of  these  variations  to  a  minimum. 
In  ordinary  contracts  the  danger  from  momentary  fluctuations  outweighs  the 
gain  from  permanent  steadiness,  because  sudden  changes  involve  worse  vio- 
lations of  commercial  equity  than  slow  ones. 

*  Menger  has  observed  that  the  essential  characteristic  of  money  is  its 
saleableness.  If  the  same  thing  serves  at  once  as  a  medium  of  exchange 
and  a  basis  of  contracts,  it  combines  present  and  permanent  saleableness  in 
the  highest  degree. 


COMMODITIES    USED  AS  MONEY.  1 83 

§  205.  Any  commodity  can  serve  as  money  where  the 
public  accepts  it  without  question  as  a  unit  of  reckoning 
and  a  means  of  settlement  of  debts.  To  this  end  it  is 
only  necessary  that  it  should  be  universally  desired,  so 
that  no  man  need  fear  having  it  left  on  his  hands  ;  and 
that  it  should  be  homogeneous,  so  that  people  demand  a 
certain  quantity  of  it  rather  than  a  specified  piece  of  it. 
Articles  of  the  most  diverse  sort,  like  the  salt  of  Abyssinia, 
the  tobacco  cakes  of  the  Virginia  colonists,  or  the  shells 
which  formed  the  wampum  of  the  North  American  In- 
dians, have  been  use?!  as  money  by  communities  in  differ- 
ent stages  of  civilization.  Among  pastoral  peoples  cattle 
serve  as  a  unit  of  reckoning,  and  not  infrequently  as  a 
medium  of  exchange.  The  Latin  name  for  money, 
pecunia,  is  derived  from  pecus,  a  flock ;  and  it  is  probable 
that  the  English  word  "  fee  "  is  connected  etymologically 
with  the  German  Vieh,  cattle, 

§  206.  Metals  have  some  advantages  over  all  other  com- 
modities for  use  as  money.  In  the  first  place,  they  are 
more  permanent.  They  are  not  liable  to  destruction  by 
fire  nor  to  quick  consumption  in  emergencies.  There  is 
thus  a  large  permanent  stock  of  metal  carried  over  from 
year  to  year,  which  makes  the  available  supply  less  de- 
pendent upon  fluctuations  in  current  production.  The 
world's  stock  of  gold  coin  and  bars  probably  amounts  to 
nearly  four  thousand  million  dollars — many  times  the 
annual  production  or  consumption.  Under  such  circum- 
stances, the  amount  produced  in  any  one  year  might  be 
greatly  increased  or  diminished  without  causing  more  than 
a  slight  effect  on  the  total  volume  in  use.  If  this  state 
of  things  continued  for  a  series  of  years,  we  should  have 
a  gradual  expansion  or  contraction  of  the  world's  gold 
currency ;  but  the  large  permanent  stock  would  make  the 
percentage  of  annual  increase  or  diminution  so  small  as 
to  allow  contracts  to  adjust  themselves  to  the  change  in 
conditions. 


1 84  MONEY, 

The  metals  are  also,  as  a  rule,  more  homogeneous  than 
any  other  commodities  in  use,  and  offer  great  mechanical 
advantages  as  means  of  exchange.  They  can  be  cut  into 
pieces  of  whatever  size  is  wanted,  and  these  pieces  can 
pass  from  hand  to  hand;  being  accepted  either  by  ac- 
count or  by  weight,  as  the  importance  of  the  transaction 
demands. 

§  207.  The  choice  of  a  metal  for  use  as  money  has  de- 
pended mainly  on  its  cost  of  production.  If  the  cost 
was  too  low  as  compared  with  the  purchases  of  daily 
life,  the  pieces  of  money  became  so  large  as  to  be 
inconvenient  to  handle.  If  the  cost  was  too  high  as  com- 
pared with  that  of  articles  to  be  exchanged,  the  pieces  of 
money  became  so  small  as  to  be  incapable  of  the  neces- 
sary subdivision  without  great  danger  of  loss.  As  the 
knowledge  of  mining  and  metallurgy  has  increased  there 
is  a  tendency  to  substitute  more  costly  metals  for  less 
costly  ones,  on  the  basis  of  convenience  alone.  Iron,  which 
was  in  occasional  use  in  ancient  times  for  coins  of  low 
value,  has  been  displaced  by  copper  and  nickel.  Copper, 
which  was  first  used  for  transactions  of  considerable  mo- 
ment (the  Roman  as  being  originally  a  pound  of  copper), 
has  been  gradually  relegated  to  a  position  of  trifling  im- 
portance. Silver,  which  was  formerly  a  medium  of  ex- 
change for  very  large  transactions,  has  now  on  the  whole 
given  place  to  gold  for  these  purposes. 

On  the  other  hand,  a  metal  may  be  too  rare  to  com- 
mand universal  acceptability.  The  experiments  of  Rus- 
sia in  coining  platinum  did  not  prove  a  success.  Even 
gold  has  a  relatively  low  value  among  less  civilized 
nations,  which  have  but  slight  experience  of  large  trans, 
actions.  There  was  a  time  when  an  ounce  of  gold  in 
Europe  would  purchase  thirteen  or  fourteen  ounces  of 
silver,  but  could  be  bought  for  three  or  four  ounces  of 
silver  in  the  far  East. 

§  208.  When  the  government  or  some  accredited  agent 


COINAGE.  185 

of  the  government  places  a  stamp  upon  a  piece  of  metal 
certifying  its  weight  and  fineness,  the  process  is  known  as 
coinage.  When  the  genuineness  of  a  coin  is  undoubted, 
it  has  a  great  advantage  over  uncoined  metal  as  a  medium 
of  exchange.  People  will  then  accept  it  by  tale  or  count 
instead  of  by  weight.  Such  acceptance  furnishes  a  temp- 
tation to  the  counterfeiter,  who  attempts  to  place  a  stamp 
like  that  of  the  government  on  baser  metal  or  on  a  piece 
of  inferior  size,  and  to  the  clipper  or  sweater,  who  at- 
tempts to  abstract  part  of  the  metal  from  the  coin  by 
processes  which  will  not  so  greatly  change  its  appearance 
as  to  prevent  its  acceptance  in  ordinary  transactions.  To 
meet  the  danger  of  counterfeiting  there  has  been  a  con- 
stant improvement  in  the  art  of  coinage.  The  oldest 
coins  have  a  stamp  on  but  one  side.  A  little  later  the 
stamp  was  put  on  both  sides,  so  that  the  thickness  of  the 
metal  could  not  be  reduced  without  defacing  the  stamp 
itself.  To  prevent  clipping,  the  edges  were  milled  by 
mechanical  devices.  To  defeat  the  art  of  the  sweater, 
provision  was  made  for  the  retirement  and  recoinage  of 
pieces  that  began  to  show  the  effects  of  natural  wear ; 
thus  rendering  artificially  worn  coin  an  object  of  public 
distrust. 

§  209.  Where  a  system  of  coinage  has  become  estab- 
lished it  is  customary  for  the  government  to  declare  its 
coins  legal  tender  for  all  debts.  A  seller,  laborer  or  cred- 
itor, if  he  has  agreed  to  receive  a  certain  amount  of 
money  in  settlement  of  what  is  due  him,  is  obliged  to 
accept  such  coins  as  money.  They  are  a  "  legal  tender," 
which  he  has  no  right  to  refuse  unless  his  contract  has 
been  made  in  terms  of  some  commodity  other  than 
money.  Where  the  coin  is  really  acceptable,  and  the 
function  of  government  is  only  that  of  certification,  the 
legal  tender  feature  simply  gives  effect  to  the  public  will, 
and  prevents  annoyance  and  uncertainty.  Where  for  any 
reason  the  money  is  not  thus  universally  acceptable,  and 


1 86  MONEY. 

the  government  attempts  to  create  by  legislation  a  de' 
mand  and  a  purchasing  power  which  does  not  otherwise 
exist,  the  opportunity  to  declare  a  coin  legal  tender  is  apt 
to  be  abused.  Such  abuse  is  most  common  and  flagrant 
in  communities  which  are  about  three-fourths  civilized. 
Before  they  have  reached  this  stage,  people  make  con- 
tracts payable  by  weight,  because  they  have  not  yet 
learned  the  uses  of  coinage ;  after  they  have  passed  this 
stage,  they  have  recourse  to  the  same  means,  because 
they  have  learned  the  abuses  of  coinage  and  the  methods 
of  protecting  themselves  against  them.  The  authority  of 
the  government  in  making  money  acceptable  seems  quite 
unlimited  as  long  as  it  is  used  to  give  expression  to  the 
will  of  the  property-holders  ;  but  when  once  it  attempts 
to  act  independently  of  that  will,  it  is  found  to  be  very 
shadowy. 

§  210.  When  the  government  agrees  to  put  its  stamp  of 
weight  and  fineness,  and  thus  bestow  the  legal  tender 
character,  on  any  piece  of  metal  of  the  required  size  and 
quality,  we  are  said  to  have  free  coinage  of  that  metal. 
This  does  not  mean  that  it  is  done  for  nothing,  but  that  it 
is  done  for  every  one  who  desires  it,  and  at  a  price  not 
disproportionate  to  the  actual  cost  of  the  operation.  The 
work  of  coinage  involves  certain  expenses  to  the  govern- 
ment for  assaying  and  minting,  amounting  in  the  case  of 
modern  standard  coin  to  about  one-fifth  of  one  per  cent. 
If  a  private  person  brings  gold  to  the  mint  to  have  its 
weight  and  fineness  certified,  most  governments  retain  an 
amount  of  metal  sufficient  to  defray  this  expense.  A 
few  nations,  like  England,  have  made  no  such  deduction, 
believing  that  it  is  an  advantage  to  the  country  to  allow 
people  to  convert  their  gold  into  coin  with  the  utmost 
freedom,  and  that  the  government  for  the  sake  of  this 
public  advantage  can  well  bear  the  small  loss  which  is 
involved.  The  balance  of  opinion  is  on  the  whole  against 
this  view.     Countries  like  the  United  States  or  France 


SEIGNIORAGE.  1 8/ 

which  make  a  small  charge  for  coinage,  in  order  to  cover 
the  expense  of  the  process,  have  habitually  performed  the 
work  better  than  those  which  have  done  it  for  nothing. 
The  advantage  to  the  public  in  the  superior  execution  of 
the  coinage  has  been  of  more  consequence  than  the  slight 
gain  in  the  elasticity  of  the  currency  which  the  English 
business  world  may  have  enjoyed. 

§211.  In  some  cases  the  government  retains,  for  the 
profit  of  the  exchequer,  an  amount  larger  than  the  actual 
cost  of  coinage.  A  charge  of  this  kihd  is  known  as 
seigniorage^  The  word  is  derived  from  the  fact  that 
rights  of  coinage  in  mediaeval  times  were  often  made  a 
most  valuable  prerogative  of  the  "  seignior  "  or  feudal 
lord. 

Almost  every  civilized  nation  deducts  a  considerable 
seigniorage  from  its  smaller  coins ;  that  is,  it  puts  less 
metal  into  these  coins  than  they  can  purchase  in  the  open 
market.  The  object  of  this  practice  is  to  prevent  them 
from  being  melted  down  for  use  in  the  arts  or  for  export. 
A  certain  amount  of  small  currency  is  always  needed  as  a 
medium  of  excliange.  If  any  of  it  is  withdrawn  for  use  in 
the  arts  the  remainder  becomes  inadequate  for  monetary 
transactions,  which  causes  great  inconvenience,  if  not 
hardship.  Now  if  the  metal  in  a  half  dollar  is  worth  less 
than  half  as  much  as  the  amount  of  metal  in  a  dollar, 
people  will  choose  the  large  coin  to  melt  down,  and  the 
small  coin  will  remain  in  circulation.  When  the  frac- 
tional currency  is  made  of  a  different  material  from  the 
larger  currency,  this  principle  is  equally  applicable.  If  a 
hundred  cents  contained  a  dollar's  worth  of  nickel  and 
other  metals  combined  with  it,  not  only  would  the  cents 
be  of  inconvenient  bulk,  but  we  should  be  in  constant 
danger  of  having  them  withdrawn  from  circulation  and 

'  The  name  "  seigniorage  "  is  sometimes,  though  less  properly,  applied  to 
the  small  charge  described  in  the  previous  paragraph.  This  is  better  desig- 
nated by  the  French  term  brassage. 


1 88  MONEY. 

melted  if  the  price  of  nickel  went  up  while  that  of  gold 
remained  stationary.  In  order  to  maintain  this  currency 
in  daily  use  at  a  value  higher  than  that  of  the  bullion 
which  it  contains,  the  government  limits  the  quantity  of 
such  issues  to  the  actual  wants  of  the  people.  Two  half 
dollars  are  worth  as  much  as  one  dollar,  because  half 
dollars  are  needed  for  current  purposes  of  exchange.  As 
a  rule,  governments  do  not  give  this  fractional  currency 
the  attribute  of  legal  tender,  except  in  small  amounts. 
Limited  issues  of  small  currency  containing  less  than  its 
market  value  of  metal  are  known  as  subsidiary  coin. 

Where  a  seigniorage  is  abstracted  not  only  from  the 
subsidiary  coin,  but  from  the  legal  tender  money,  the  pro- 
cess is  known  as  debasement. 

§  212.  If  a  relatively  small  amount  of  debased  currency 
is  issued,  its  chief  effect  is  to  drive  a  nearly  corresponding 
amount  of  better  money  out  of  circulation. 

If  the  people  of  a  country  have  been  in  the  habit  of 
using  a  thousand  million  dollars  of  standard  weight,  it 
shows  that  this  amount  is  needed  as  a  reserve  for  carry- 
ing on  the  business  of  the  country  at  the  old  price  level. 
The  loss  of  productive  power  due  to  any  attempt  to  trans- 
act business  with  a  smaller  cash  capital  is  greater  than 
the  gain  from  the  use  of  a  little  more  metal  in  the  arts,  or 
from  the  purchase  of  foreign  products  with  that  metal. 
But  if  the  government  adds  one  hundred  million  light- 
weight dollars  to  the  money  of  the  country,  this  equilib- 
rium will  be  destroyed.  The  increase  in  the  number  of 
dollars  in  the  country  will  tend  to  make  each  dollar  worth 
less,  and  given  sums  of  money  will  purchase  fewer  goods. 
Under  these  circumstances,  some  dollars  will  be  melted 
down  for  use  in  the  arts,  and  some  will  be  exported  to 
buy  foreign  products,  until  the  supply  of  dollars  is  reduced 
to  approximately  its  old  amount. 

The  dollars  chosen  for  melting  or  for  export  will  be  the 
ones  which  contain  the  largest  weight  of  metal.     For  if 


GRESHAM'S  LAW.  1 89 

two  coins  are  equal  in  debt-paying  power,  but  unequal  in 
utility  in  other  respects,  a  man  will  reserve  the  worse  coin 
for  paying  his  debts,  and  use  the  better  coin  for  purposes 
where  its  advantage  is  felt.  This  tendency  of  bad  money 
to  drive  out  good  money  was  noted  by  so  ancient  an 
observer  as  Aristophanes.  It  was  brought  prominently 
to  the  notice  of  the  English-speaking  world  by  Sir 
Thomas  Gresham,  the  chief  financial  agent  under 
Elizabeth,  and  is  commonly  referred  to  as  Gresham  s 
Law. 

§  213.  When  the  amount  of  debased  currency  has  be- 
come so  great  as  to  afford  the  necessary  reserve  for  all 
transactions  in  which  the  government  can  compel  the 
creditor  to  accept  this  form  of  payment,'  the  limit  of  dis- 
placement is  reached.  For  when  all  the  current  circula- 
tion of  the  country  is  debased,  there  is  none  left  which  can 
be  advantageously  used  in  the  arts  or  for  export.  Any 
further  issue  will  produce  a  redundant  stock  of  money, 
and  a  fall  in   the  value  of  each  piece  of  money,  which 

'  As  the  amount  of  debased  money  grows  larger,  its  sphere  of  usefulness 
grows  smaller.  Importers  and  others  engaged  in  foreign  trade  have  to  pro- 
vide themselves  with  a  certain  amount  of  cash  reserve  which  derives  its  value 
from  something  more  wide-reaching  in  its  effects  than  a  legal  tender  act. 
Farsighted  capitalists,  who  fear  the  future  fiscal  policy  of  the  government, 
insert  stipulations  in  their  loans  or  in  their  leases,  requiring  payment  of  dues 
in  some  specific  commodity  rather  than  in  the  general  currency  of  the  country. 
Even  as  a  medium  of  exchange  in  domestic  transactions,  the  debased  money 
may  be  discredited  by  the  action  of  the  people.  D'Avenel  has  collected 
some  curious  facts  which  show  that  the  arbitrary  changes  in  coinage  made 
by  the  French  crown  were  to  a  large  extent  rendered  inoperative  in  this  way. 
The  same  result  was  seen  in  California,  during  the  Civil  War,  when  the 
public  was  able  to  nullify  the  legal  tender  act  and  prevent  the  use  of  paper 
currency  as  money  throughout  the  state.  A  man  might  pay  one  debt  in 
paper,  but  he  was  thereby  cut  off  from  the  chance  of  doing  a  credit  business 
afterward.  In  the  rest  of  the  country  paper  money  was  available  for  general 
business  purposes,  but  a  certain  amount  of  gold  had  to  be  retained  by  those 
engaged  in  the  foreign  trade,  for  the  adjustment  of  their  purchases  abroad 
and  for  payments  of  any  customs  duties  to  the  United  States  at  home.  The 
interest  payments  of  the  United  States  Government  on  the  great  bulk  of  its 
loans  also  involved  the  use  of  gold  coin,  and  correspondingly  restricted  the 


190  MONEY. 

manifests  itself  in  the  form  of  rising  prices.  If  the  govern- 
ment persists  in  putting  debased  coin  into  circulation, 
this  increase  in  the  amount  of  currency  and  diminution  in 
its  value  can  go  on  until  the  purchasing  power  of  the  coin 
falls  so  low  as  to  allow  it  to  be  melted  down  or  exported 
in  spite  of  the  seigniorage. 

Such  an  increase  in  debased  currency  beyond  the  dis- 
placement limit,  is  known  as  inflation  ;  the  resulting  loss 
in  purchasing  power  is  known  as  depreciation. 

Debasement  usually  results  in  depreciation,  because  the 
fiscal  motive  to  expand  the  amount  of  a  debased  cur- 
rency is  very  great.  If  the  government  abstracts  a  cer- 
tain amount  of  bullion  and  coins  the  remainder,  the  bullion 
as  bullion  is  relatively  useless.  The  temptation  to  coin 
the  seigniorage  as  a  means  of  paying  current  expenses,  or 
of  meeting  some  unexpected  emergency,  is  enormous. 
This  motive,  seconded  as  it  habitually  is  by  the  interest, 
real  or  supposed,  which  many  voters  have  in  seeing  an 
increased  abundance  of  money,  has  proved  well-nigh  irre- 

field  of  circulation  of  paper.  In  later  years,  in  connection  with  the  agitation 
for  silver  coinage,  the  number  of  obligations  which  specifically  promised 
payment  in  gold  was  gradually  increased.  It  is  obvious  that  if  the  United 
States  should  change  from  a  gold  to  a  silver  standard,  a  large  part  of  the 
transactions  of  the  country  must  still  be  fulfilled  in  gold,  unless  the  courts 
should  legalize  a  direct  violation  of  specific  promises. 

The  parity  of  gold  and  silver  dollars  is  to-day  jeopardized,  not  because  the 
supply  of  silver  money  has  become  nearly  equal  to  theV^/a/ demand  of  the 
United  States  for  currency,  but  because  it  has  become  nearly  equal  to  that 
part  of  the  currency  demand  over  which  the  legal  tender  act  exercises  effec- 
tive control.  There  is  no  reason  to  apprehend  that  the  country  will  lose  all 
its  gold.  But  there  is  a  great  deal  of  apprehension  that  people  will  cease  to 
treat  gold  and  silver  dollars  as  equivalent.  To  keep  them  at  equal  value  the 
government  has  been  compelled  not  only  to  stop  the  coinage  of  silver  dollars, 
but  to  pay  gold  on  demand  for  any  of  its  coin  obligations.  The  equivalence 
between  the  two  forms  of  currency  is  thus  made  dependent,  not  on  the  large 
stock  of  gold  in  the  country,  but  on  the  small  stock  of  gold  in  the  treasury  ; 
not  on  the  solvency  of  the  United  States  as  a  nation,  but  on  the  sufficiency 
of  the  current  receipts  of  the  United  States  Government — a  far  more  preca- 
rious matter. 


REDEEMABLE  PAPER.  I9I 

sistible.  The  world's  monetary  history  shows  that  very 
few  governments  have  been  able  to  resist  the  temptation 
which  the  existence  of  a  seigniorage  involves. 

§  214.  Paper  money  is  a  convenient  substitute  for  gold 
or  silver  on  account  of  its  lack  of  weight,  and  has  there- 
fore come  into  increasing  use  as  transactions  have  grown 
larger.  It  has  three  forms,  governed  by  different  laws  and 
to  be  judged  on  wholly  different  principles. 

1.  Coin  or  bullion  certificates.  These  certificates  simply 
state  than  an  amount  of  coin  or  bullion  corresponding  to 
the  face  of  the  note  has  been  deposited  with  the  govern- 
ment and  is  held  as  a  fund  to  redeem  that  note,  not  to  be 
used  for  any  other  purpose  whatsoever.  The  amount  of 
coin  or  bullion  thus  specially  reserved  always  corresponds 
exactly  to  the  amount  of  coin  certificates.  These,  there- 
fore, have  exactly  the  same  purchasing  power  as  the  coin 
or  metal  for  which  they  call.  They  are  more  convenient 
to  handle  than  metal  and  do  not  involve  any  danger 
except  that  of  absolutely  reckless  dishonesty  and  viola- 
tion of  pledges  on  the  part  of  the  government ;  a  vio- 
lation which  is  not  likely  to  occur  with  deposits  thus 
specifically  appropriated.  The  gold  and  silver  certificates 
in  the  United  States,  and  (to  all  intents  and  purposes) 
the  notes  of  the  Bank  of  England  (see  chapter  viii),  are 
of  this  description. 

2.  Redeemable  paper.  Like  the  coin  certificate,  this  is 
a  promise  on  the  part  of  the  government  to  pay  coin  ;  but, 
unlike  the  coin  certificate,  it  is  secured  only  by  the  general 
solvency  of  the  treasury  department,  and  not  by  a  specific 
deposit,  dollar  for  dollar.  Experience  proves  that  this  is 
not  nearly  so  safe  a  reliance  as  that  on  which  the  coin  cer- 
tificate is  based.  The  government,  in  issuing  notes  which 
are  secured  by  the  general  assets  of  the  treasury,  is  really 
doing  a  banking  business,  whose  safety  depends  upon  the 
degree  in  which  the  administration  and  the  legislature 
understand  the  methods  of  banking.     At  the  very  best, 


igZ  MONEY, 

there  is  danger  that  the  assets  on  which  the  government 
relies  for  the  payment  of  such  notes  will  fail  in  an  emer- 
gency. The  treasury  department  is  not  well  constituted 
for  doing  a  general  banking  business.  The  assets  of  the 
government  are,  for  the  most  part,  permanent  investments 
of  a  kind  which  it  is  not  easy  to  sell  at  short  notice.  When 
a  fiscal  emergency  arises  the  dangerous  power,  possessed 
by  the  legislature,  of  declaring  such  notes  a  legal  tender 
even  if  they  are  not  redeemed,  is  a  constant  menace  to 
financial  stability. 

3.  Irredeemable  paper.  This  is  neither  more  nor  less 
than  money  on  which  the  government  has  charged  a 
seigniorage  of  approximately  one  hundred  per  cent.  It 
is  subject  in  an  exaggerated  degree  to  all  the  dangers 
arising  from  debased  coin.  If  a  coin  is  debased  twenty 
per  cent  there  is  a  limit  to  the  issue  of  such  coins  by  the 
government.  When  that  issue  has  goqe  so  far  that  prices 
have  risen  twenty-five  per  cent,*  the  profit  to  the  govern- 
ment on  further  issue  stops,  and  the  danger  from  this 
source  reaches  its  natural  limit.  But  in  the  case  of  irre- 
deemable paper  such  issues  may  go  on  indefinitely,  until 
legal  tender  provisions  are  nullified  by  the  refusal  of  the 
people  to  accept  the  discredited  paper. 

§  215.  Besides  these  various  forms  of  government  pa- 
per, the  banks  of  most  countries  issue  notes  which  are 
intended  to  circulate  from  hand  to  hand.  Except  in 
those  comparatively  rare  instances  where  bank-notes  are 
made  a  legal  tender,  they  do  not  properly  come  within 
the  definition  of  money.  They  are  only  promises  to  pay 
money,  which  are  made  by  responsible  corporations. 
But  the  note  of  a  bank  is  apt  to  be  quite  as  good  as 
that  of  the  government  which  charters  the  bank  ;  and 
we  find  both  kinds  of  paper  in  circulation  side  by  side. 

The  sum  total  of  instruments  of  circulation  which  pass 

'  If  the  value  of  $i  falls  to  $0.80,  things  which  formerly  sold  for  $1  will 
now  sell  for  about  $1.25. 


THE   GENERAL   PRICE  LEVEL.  1 93 

from  hand  to  hand — coin,  government  notes,  and  bank- 
notes— is  known  as  the  currency. 

Of  equal  importance  as  means  of  exchange  are  certain 
instruments,  like  bank  checks,  which  do  not  circulate 
from  hand  to  hand,  but  which  are  cancelled  when  they 
have  served  to  settle  one  transaction,  or  at  most  a  short 
series  of  transactions.  The  conditions  which  govern  the 
use  of  these  instruments  as  substitutes  for  money  are 
described  in  the  next  chapter. 

§  216.  The  value  of  money  is  measured  by  the  quantity 
of  other  things  which  a  unit  of  money  will  purchase.  It 
varies  inversely  as  the  general  level  of  prices.  If  general 
prices  are  high,  a  given  amount  of  products  or  services 
will  cost  a  great  many  dollars.  This  of  course  means 
that  a  given  number  of  dollars  will  buy  comparatively 
few  products  or  services.  The  purchasing  power  or  value 
of  money  is  therefore  low  when  the  price  level  is  high, 
and  vice  versa. 

If  the  prices  of  different  commodities  rose  or  fell  simul- 
taneously, it  would  be  easy  to  ascertain  the  amount  of 
change  in  the  general  price  level  and  in  the  value  of 
money.  But  the  price  of  each  article  is  subject  to  inde- 
pendent variations  of  its  own.  Some  articles  rise  while 
others  fall.  Under  these  circumstances  the  problem  of 
determining  the  general  price  level  becomes  an  extremely 
difficult  one.  Several  different  methods  have  been  pro- 
posed for  its  solution.  Under  the  method  first  used, 
which  has  the  advantage  of  simplicity,  w-e  take  the  re- 
corded prices  of  a  number  of  articles  in  a  market  where 
statistics  have  been  accurately  kept  for  a  series  of  years. 
We  select  some  one  year  for  a  basis  of  comparison,  and  call 
the  price  of  each  article  in  that  year  100.  We  then  compare 
the  price  of  each  article  in  the  next  year  with  its  price  in 
the  year  which  we  have  chosen  for  our  basis  of  compari- 
son, and  take  the  average  of  the  percentages  thus  ob- 
tained to  constitute  what  is  known  as  the  index  number 
13 


194  MONE  Y. 

for  the  year  in  question.  For  instance,  if  we  choose  i860 
as  our  base,  and  are  considering  four  articles  whose  prices 
in  1861  were  respectively  98  per  cent,  loi  percent,  104 
per  cent,  and  109  per  cent  of  those  in  i860,  the  average 
recorded  price  of  these  four  articles  in  1861  would  be  103 
percent  of  the  average  for  i860.  If  the  level  of  prices  in 
i860  were  represented  by  the  index  number  100,  that  in 
1861  would  be  represented  by  the  index  number  103. 

The  results  obtained  by  this  method  are  somewhat 
arbitrary,  because  they  depend  upon  the  articles  selected 
for  observation.  This  difficulty  may  be  partly  met  by 
dealing  with  as  wide  a  range  of  articles  as  possible.'  But 
even  when  we  apply  it  with  the  utmost  completeness  this 
method  is  defective,  in  that  it  fails  to  take  account  of 
differences  in  importance  between  different  commodities. 
It  is  unfair  to  let  a  rise  in  the  price  of  pepper  offset  a  cor- 
responding fall  in  the  price  of  wheat,  because  the  total 
expenditure  for  the  one  is  so  much  less  than  for  the  other. 
To  avoid  this  dif!iculty  Palgrave  has  urged  the  use  of  a 
weigjited  average  of  prices  where  each  article  is  given  an 
importance  proportionate  to  the  quantity  marketed,  as 
recorded  in  trade  statistics.  Falkner,  working  for  the 
United  States  Senate  Committee  on  Wages  and  Prices, 
has  adopted  a  modification  of  Palgrave's  method,  in 
which  he  assigns  commodities  their  relative  importance 
not  on  the  basis  of  total  amounts  sold  in  wholesale  mar- 
kets but  on  the  basis  of  quantities  used  by  the  typical 
workingman's  family."  In  point  of  fact,  the  results 
obtained  by  an  unprejudiced  application  of  the  three 
methods  are  substantially  alike.  They  all  indicate  that 
gold  prices  in  different  countries  rose  from  1850  to  1873, 

'  The  tables  of  the  Economist  and  of  Soetbeer  are  perhaps  the  best  and 
most  widely  known. 

*  The  method  of  the  United  States  Senate  Committee  is  open  to  criticisn) 
from  the  fact  that  it  applies  wholesale  prices  to  quantities  which  are  pur- 
chased at  retail. 


INDEX  NUMBERS.  I95 

and  have  fallen  since  that  time  ;  so  that  the  index  numbers 
which  represent  the  general  price  level  in  1890  stand 
not  far  from  the  level  of  1850.  Since  the  crisis  of  1893 
there  has  been  a  further  fall,  so  that  the  general  price 
level  of  1895  is  exceptionally  low. 

§  217.  If  we  regard  our  index  numbers  not  as  records 
of  wholesale  prices  but  as  indications  of  the  enjoyment 
obtained  in  spending  money  or  the  sacrifice  involved  in 
earning  it,  all  the  methods  which  have  been  employed 
make  the  figures  for  recent  years  lower  than  they  ought 
to  be. 

1.  They  deal  with  payments  for  products  and  not  for 
services.  The  former  have  fallen  in  price,  owing  to  labor- 
saving  improvements ;  the  latter  have  risen  quite  as  often 
as  they  have  fallen,  A  budget  of  family  expenses  should 
include  house  rent  and  services  as  well  as  supplies,  in 
order  to  indicate  the  actual  expense  of  living. 

2.  They  deal  with  wholesale  prices  instead  of  retail 
ones.  The  work  of  the  retailer  is  one  of  those  services 
which  have  been  least  affected  by  modern  improvements ; 
and  therefore  retail  prices  have  fallen  relatively  less  than 
wholesale  prices. 

3.  As  a  rule,  the  index  numbers  are  based  on  prices  in 
the  wholesale  markets  nearest  the  point  of  consumption. 
If  a  producer  is  obtaining  the  same  price  for  an  article  in 
1895  that  he  did  in  1875,  while  the  cost  of  railroad  and 
steamship  transportation  has  fallen,  the  recorded  price  of 
the  article  falls.  This  tends  to  reduce  the  index  number 
correspondingly,  and  to  show  an  apparent  loss  to  the  pro- 
ducer where  there  is  no  real  loss  to  any  one  except  the 
transportation  companies. 

All  these  causes  combine  to  make  the  gain  to  the  con- 
sumer and  the  loss  to  the  producer  from  the  observed 
fall  in  prices  much  less  than  a  superficial  view  of  the  index 
numbers  would  lead  us  to  infer. 

§218.  The  problem  of  explaining  variations  in  general 


196  MONEY. 

prices  is  even  more  complex  than  the  problem  of  deter- 
mining the  amount  of  those  variations. 

If  the  total  amount  of  business  transactions  in  the 
United  States  is  $100,000,000,000  in  1895  and  $110,000,- 
000,000  in  1896,  this  change  indicates,  from  the  standpoint 
of  the  sellers,  either  an  increase  in  the  extent  of  the  trans- 
actions themselves  or  in  the  general  price  level  on  which 
those  transactions  are  conducted.  From  the  standpoint 
of  the  buyers  it  indicates  an  increase  either  in  the  number 
of  dollars  in  use  or  in  their  rapidity  of  circulation — in  the 
amount  of  exchange  work  which  a  dollar  can  perform  in 
the  course  of  a  year.  The  $110,000,000,000  paid  by  the 
buyers  may  be  regarded  as  the  product  of  the  amount  of 
money  in  the  country  multiplied  by  its  average  rapidity  of 
circulation.  If  there  are  1,000,000,000  dollars  in  use,  a 
volume  of  business  of  $1 10,000,000,000  indicates  that  each 
dollar  on  an  average  changes  hands  1 10  times  in  the  course 
of  the  year.  The  $1 10,000,000,000  received  by  the  sellers 
may  in  like  manner  be  treated  as  the  product  of  the 
physical  volume  of  business  multiplied  by  the  general 
price  level.  If  the  price  level  of  1896  is  to  that  of  1895  as 
102 :  100,  and  the  volume  of  business  has  increased  from 
$100,000,000,000  to  $110,000,000,000,  it  indicates  that  the 
transactions  of  1896  at  the  prices  of  1895  would  have 
amounted  to  very  nearly  108,000,000,000  ;  in  other  words 
that  about  eight  per  cent  of  the  increase  in  the  monetary 
transactions  is  due  to  changes  in  the  amount  of  transfers 
of  goods  and  securities  rather  than  to  changes  in  the  scale 
of  prices  paid. 

Let  the  amount  of  money  in  the  country  be  represented 
by  J/ and  its  rapidity  of  circulation  by  R.  Let  the  price 
level  of  1896  be  represented  by  P  (that  of  1895  being 
treated  as  unity).  Let  the  transactions  of  1896,  estimated 
at  the  prices  of  1895,  be  represented  by  T.  Then  RxM 
will  represent  the  total  of  prices  paid  by  buyers  and  /*X  T 
the  total  of  prices  received  by  sellers.    The  two  products 


CIRCULATION  AND  PRICES.  1 97 

obviously  represent  opposite  aspects  of  exactly  the  same 
series  of  transactions  ;  so  that  as  a  matter  of  necessity, 

RXM=  PXT 

If  we  can  treat  the  rapidity  of  circulation  and  the  extent 
of  business  transactions  as  constant,'  the  qtiantity  oftnoney 
and  the  general  level  of  prices  will  be  proportionate  to  one 
another. 

§  219.  This  proposition  simply  states  a  fact.  It  does 
not  show  the  method  by  which  this  fact  is  brought  about, 
nor  does  it  indicate  which  of  the  things  under  discussion 
is  cause  and  which  is  effect.  When  the  amount  of  money 
is  regulated  by  the  discretion  of  the  government,  as  in  the 
case  of  irredeemable  paper,  the  changes  in  quantity  of 
money  are  the  cause,  and  the  variations  in  price  level  are 
the  effect.  Whatever  may  be  the  quantity  issued,  the 
prices  will  tend  to  adjust  themselves  to  it  with  great 
rapidity.  If  the  government  inflates  the  currency  ten  per 
cent  it  is  forced  to  make  most  of  its  purchases  with  that 
money  at  a  ten  per  cent  advance  because  active  business 
men  know  enough  of  commercial  history  to  be  sur^  that 
an  increase  in  the  number  of  dollars  means  a  proportionate 
fall  in  the  purchasing  power  of  each  dollar.  Among  per- 
sons of  less  commercial  intelligence,  prices  will  not  adjust 
themselves  to  the  new  conditions  quite  so  rapidly,  and 
there  will  be  a  time  when  their  more  astute  neighbors 
make  a  profit  by  paying  them  in  an  inflated  currency  at 
the  old  scale  of  prices.  But  this  state  of  things  is  quite 
transient,  and  the  general  price  level  soon  adjusts  itself 
to  the  volume  of  government  paper  in  circulation. 

When  the  amount  of  money  is  regulated  by  the  dis- 
cretion of  individuals,  under  a  system  of  free  coinage,  the 
case  is  more  complicated.  Changes  in  the  quantity  of 
money  under  this  system  are  at  once  a  cause  and  an  effect 

'  Or  as  rising  and  falling  together.  The  study  of  the  conditions  which 
affect  rapidity  of  circulation  must  be  reserved  for  the  next  chapter. 


198  MONE  Y. 

of  changes  in  general  price  level.  If  we  have  to  choose 
between  the  two  ways  of  looking  at  the  matter  there  is  in 
the  majority  of  cases  less  error  in  treating  them  as  an 
effect  than  as  a  cause.  The  amount  of  production  and 
coinage  of  gold  is  so  far  affected  by  changes  in  the  general 
price  level  that  it  tends  to  adapt  the  supply  of  money  to 
the  demand  and  mitigates  changes  in  general  prices  far 
oftener  than  it  causes  them. 

§  220.  Under  a  free  coinage  system,  the  amount  of 
money  is  not  fixed  by  action  of  the  government,  but  is 
allowed  to  adjust  itself  to  the  wants  of  trade.  If  the 
marginal  utility  (§  92)  of  an  ounce  of  gold  in  the  arts  is 
less  than  the  marginal  utility  of  the  products  for  which  it 
can  be  exchanged  when  used  as  money,  there  will  be  a 
tendency  to  withdraw  gold  from  the  arts  and  convert  it 
into  money.  If  the  utility  of  gold  in  the  arts  is  greater 
than  the  utility  of  the  things  which  it  will  purchase  when 
used  as  money,  the  process  is  reversed  ;  coin  is  melted 
down,  and  used  in  gold  manufactures.  Equilibrium  is 
reached  when  the  marginal  utility  of  an  ounce  of  gold 
employed  in  the  arts  is  equal  to  the  marginal  utility  of 
the  things  which  that  ounce  will  buy  if  it  is  converted 
into  money. 

This  is  sometimes  treated  as  a  solution  of  the  problem 
of  the  value  of  money.  It  is  far  from  being  a  full  one. 
It  indicates  certain  conditions  which  prevail  when  the 
adjustment  between  quantity  and  price  is  complete ;  but 
it  does  not  adequately  describe  or  explain  the  processes 
by  which  this  adjustment  is  brought  about. 

§  221.  The  average  amount  of  gold  coin  held  in  a  coun- 
try as  a  reserve  during  the  year  will  be  the  sum  of  the 
average  reserves  held  by  individual  citizens  or  corpora- 
tions. If  a  nation  uses  no  banking  system,  each  indi- 
vidual must  hold  a  relatively  great  reserve  of  coin,'     If  it 

'  Equal  to  his  average  payments  per  day  multiplied  by  the  average  time 
that  elapses  between  his  receipts  and  payments— ^/««  a  slight  margin  for 
contingencies. 


r 


CASH  RESERVES  AS  CAPITAL.  I99 

uses  bank  checks  as  means  of  making  large  payments, 
the  individual  can  avail  himself  of  a  bank  account  instead 
of  a  cash  reserve  for  such  payments,  and  the  amount 
of  coin  which  the  nation  needs  as  a  reserve  to  secure 
prompt  settlement  of  these  transactions  will  be  greatly 
reduced  (§  269).  If  the  nation  uses  bank  notes  as  well  as 
bank  checks,  thus  making  small  payments  as  well  as  large 
ones  on  the  basis  of  bank  credit,  the  reserve  necessary 
to  secure  the  smaller  transactions  can  be  similarly  re- 
duced (§  275).  But  whether  the  amount  needed  be  larger 
or  smaller,  whether  it  be  held  directly  in  the  cash  drawer 
or  indirectly  in  the  bank,  a  certain  amount  of  capital  must 
be  kept  in  the  form  of  money.  If  an  individual  tries  to 
reduce  his  cash  capital  to  a  figure  lower  than  this,  the 
loss  from  doing  business  with  inadequate  money  is 
greater  than  the  gain  from  having  more  capital  to  put 
into  machinery  or  other  things  which  are  more  obviously 
productive  than  money.  If  a  man  invests  $10,000  in 
machinery,  and  keeps  a  cash  reserve  of  $2000,  it  is  be- 
cause the  loss  of  profit  from  reducing  his  cash  reserve  to 
$1000  more  than  balances  the  gain  in  profit  which  would 
result  from  increasing  his  investment  in  machinery  to 
$11,000.  For  the  sake  of  the  profit  to  be  derived  from 
holding  a  money  reserve,  he  causes  gold  to  be  treated  as 
productive  capital  instead  of  being  used  in  the  arts;  just 
as  he  withdraws  a  certain  amount  of  iron  or  copper  from 
uses  which  give  immediate  enjoyment,  to  those  which 
promise   future  profit.'     The   fact  that  the  gold  appro- 

'  The  great  apparent  difference  betyeen  permanent  investments  of  gold 
in  money  and  permanent  investments  of  iron  in  machines,  or  copper  in  wires, 
is  due  to  two  facts,  i.  The  investments  of  gold  as  capital  can  be  converted 
back  into  means  of  direct  enjoyment  with  little  or  no  loss,  while  those  of 
iron  or  copper  cannot.  2.  The  laws  governing  the  utility  of  the  total  in- 
vestment of  gold  are  much  more  uniform  than  those  which  govern  the  utility 
of  the  total  investment  of  iron  or  copper.  But  after  making  allowance  for 
both  these  differences,  the  process  of  using  gold  as  money  is  far  more 
closely  analogous  to  that  of  using  other  commodities  as  productive  capital 
than  most  writers  have  assumed. 


200  MONE  Y, 

priated  as  capital  consists  of  individual  pieces  which  cir- 
culate from  hand  to  hand,  obscures  the  relation  between 
investments  in  money  and  investments  in  machinery,  but 
does  not  essentially  alter  it. 

The  nation's  demand  for  money,  measured  as  capital — 
and  this  is  our  only  practicable  way  of  measuring  the 
quantities  of  money — is  the  sum  of  the  cash  reserves 
which  the  individual  members  of  the  nation  deem  neces- 
sary for  their  maximum  profit.  The  higher  the  general 
price  level,  the  greater  will  be  the  amount  of  money 
which  it  is  necessary  to  hold  as  a  reserve ;  for  with  a  high 
price  level  a  given  amount  of  money  will  settle  a  smaller 
number  of  transactions. 

§  222.  If  there  is  a  temporary  deficiency  of  the  money 
reserve,  those  who  have  not  provided  themselves  with 
adequate  means  of  making  payments  will  try  to  make 
use  of  the  gold  of  individuals  or  nations  who  have  pro- 
vided themselves  with  a  slight  margin  above  their  im- 
mediate wants.  This  they  will  do  by  offers  of  more  than 
the  usual  rate  of  interest  on  short  time  loans.  If  this 
high  rate  of  interest  on  short  time  loans  lasts  so  long  as 
to  neutralize  the  profit  obtained  from  holding  capital  in 
other  forms,  people  will  try  to  sell  their  goods  and  securi- 
ties in  order  to  get  gold.  This  will  diminish  the  price  of 
goods  and  increase  the  purchasing  power  of  gold.  This 
change  will  usually  cause  some  gold  to  be  imported  from 
other  countries,  and  some  to  be  withdrawn  from  the  arts 
for  conversion  into  coin.  Under  a  free  coinage  system 
this  process  will  continue  until  the  stock  of  gold  available 
for  use  in  the  arts  has  become  so  reduced  and  the  stock 
of  coin  so  increased  that  the  marginal  utility  of  an  ounce  of 
gold  used  in  the  arts  is  as  large  as  the  marginal  utility  of 
the  things  which  an  ounce  of  coined  gold  will  purchase. 

The  converse  case  of  excess  in  money  reserve  shows 
corresponding  effects.  If  it  is  temporary,  the  rate  of 
commercial  interest  on  short  time  loans  falls  lower  than 


> 

T 


SUPPLY  AND  DEMAND  20I 

that  on  industrial  investments.  If  it  is  local,  it  operates 
to  send  gold  coin  away  from  the  place  where  it  is  redun- 
dant, for  the  sake  of  obtaining  higher  prices  somewhere 
else.  If  it  becomes  universal,  it  causes  gold  coin  to  be 
melted  down  for  use  in  the  arts,  until  the  diminishing 
utility  of  an  ounce  of  gold  bullion  and  the  increasing 
utility  of  the  things  purchased  by  an  ounce  of  gold  coin 
reach  a  common  level. 

§  223.  The  supply  and  demand  of  gold  money  are  in 
equilibrium  when  the  amount  of  gold  which  the  indi- 
vidual members  of  the  commercial  world  find  it  profitable 
to  hold  in  the  form  of  productive  capital — i.  e.  money — 
at  a  given  price  level,  leaves  the  remaining  supply  of 
gold,  available  for  the  consumers,  of  such  a  size  that  the 
marginal  utility  of  an  ounce  of  gold  used  in  the  arts  is 
exactly  equal  to  the  marginal  utility  of  the  goods  which 
it  will  purchase  at  current  prices  when  used  as  money. 

§  224.  This  conception  of  marginal  utility  in  its  relation 
to  money  requires  further  illustration. 

If  no  gold  were  used  as  money,  the  relative  prices  of 
gold  and  wheat  would  be  determined  by  the  enjoyment 
attending  their  use  and  the  cost  involved  in  their  produc- 
tion. Some  of  the  supplies  of  gold  could  be  produced  at 
a  cost  of  I  bushel  of  wheat  per  ounce'of  gold,  some  would 
cost  I.I,  some  1.2,  some  1.3,  some  1.4,  some  1.5  bushels. 
On  the  other  hand,  there  would  be  different  degrees  of 
utility  or  enjoyment  furnished  by  different  parts  of  the 
gold  which  might  be  purchased  in  the  market.  Some  of 
the  gold  would  give  its  possessors  an  enjoyment  for  which 
they  would  be  willing  to  sacrifice  1.5  bushels  of  wheat,  or 
more  ;  for  increased  quantities  they  would  be  willing  to 
give  but  1.4  bushels,  1.3,  1.2,  i.i,  or  i  bushel  only.  At  a 
ratio  of  one  ounce  of  gold  to  1.5  bushels  of  wheat,  the 
supply  of  gold  would  probably  be  greater  than  the  de- 
mand ;  at  one  ounce  to  i  bushel  of  wheat,  it  would  be  less 
than  the  demand.    If  the  demand  and  supply  are  equal  at 

'  In  §§  224-226  for  "ounce"  read  "gramme." 


202  MONE  Y. 

a  ratio  of  one  ounce  to  i.3»bushels,  it  means  that  the 
number  of  people  who  make  a  gain  in  utility  by  exchang- 
ing wheat  for  gold  at  this  ratio  have  a  supply  of  wheat 
corresponding  exactly  to  the  demand  of  those  who  make 
a  gain  by  selling  gold  for  wheat  on  these  terms.  When 
this  condition  is  fulfilled,  the  market  price  will  be  1,3 
bushels.  If  this  is  the  normal  price  (§  100)  as  well  as  the 
market  price,  i.e.,  if  the  rates  of  supply  and  demand  are 
permanently  equal  at  this  ratio,  it  indicates  that  the  cost 
of  producing  the  last  ounces  of  gold  is  1.3  of  the  cost  of 
producing  the  last  bushels  of  wheat  supplied  to  such  a 
market.  For  if  the  cost  of  producing  an  ounce  of  gold 
were  greater  than  that  of  1.3  bushels  of  wheat,  some  of  the 
producers  would  gradually  cease  to  mine  gold  and  devote 
their  capital  to  wheat  raising ;  and  conversely,  if  the  cost 
of  producing  one  ounce  of  gold  were  less  than  that  of  pro- 
ducing 1.3  bushels  of  wheat  which  are  exchanged  for  it, 
some  of  the  producers  would  cease  to  grow  wheat  and 
gradually  devote  their  capital  to  gold  mining." 

§  225.  Now  suppose  that  to  the  uses  of  gold  in  the  arts 
is  added  a  new  use  as  capital.  A  part  of  the  gold  which 
was  formerly  used  for  ornament  or  manufacture  will  now 
be  used  for  monetary  purposes.  The  part  which  is  given  up 
to  these  new  purposes  will  be  that  for  which  the  purchasers 
were  formerly  willing  to  give  the  lowest  rate  ;  in  the  case 
supposed,  1.3  bushels  of  wheat.  When  this  part  has  been 
coined,  none  of  the  users  of  gold  will  part  with  his  stock 
at  less  than  the  rate  of  1.4  bushels  of  wheat  to  the  ounce ; 
nor  will  he  convert  it  into  money  unless  the  scale  of  prices 
is  such  that  the  coin  made  from  an  ounce  of  his  gold  will 
buy  1.4  bushels  of  wheat.  A  new  equilibrium  is  estab- 
lished, not  between  the  demands  of  those  who  offer 
gold  in  exchange  for  wheat  and  those  who  offer  wheat 
in  exchange  for  gold,  but  between  those  who  use  gold  for 
enjoyment  and  those  who  use  it  as  capital.  The  purchas- 
ing power  of  an  ounce  of  gold  will  go  up  to  the  point  where 


T 


RATE   OF  PRODUCTION. 


203 


its  marginal  utility  as  gold  bullion  to  the  consumers  is  equal 
to  the  marginal  utility  of  any  of  the  various  articles  which 
the  money  coined  from  such  bullion  would  purchase. 

§  226.  In  this  example  we  have  supposed  the  rate  of 
production  of  gold  to  remain  unchanged.  In  point  of 
fact,  it  would  almost  certainly  increase.  As  a  result  of 
the  withdrawal  of  gold  from  use  in  the  arts,  it  would  ex- 
change at  the  rate  of  1.4  bushels  of  wheat  for  an  ounce, 
instead  of  1.3,  and  there  would  be  a  similar  alteration 
in  its  ratio  of  exchange  for  all  other  commodities.  But 
this  change  of  ratio  would  soon  increase  the  production  of 
gold.  For  there  would  be  some  persons  who  could  more 
profitably  grow  wheat  than  mine  gold  if  the  ratio  of  ex- 
change were  an  ounce  to  1.3  bushels,  but  who  could  more 
profitably  mine  gold  than  grow  wheat  if  the  ratio  were 
one  ounce  to  1.4  bushels.  And  a  number  of  other  men, 
engaged  in  the  production  of  other  commodities  besides 
wheat,  would  find  themselves  similarly  situated.  There 
would  thus  be  a  diversion  of  capital  from  agriculture  and 
manufactures  to  gold  mining,  and  an  increased  supply  of 
gold  which  would  prevent  the  change  in  the  relative 
prices  of  gold  and  wheat  from  being  so  great  as  it  other- 
wise would  be.  In  the  case  supposed,  it  might  readily 
happen  that  the  production  would  increase  until  one  ounce 
of  gold  exchanged  for  1.35  bushels  of  wheat. 


0 

\ 

\ 

/ 

V, 

^ 

^ 

•^ 

^^-^ 

gC 

P 

0 

f,     t 

'if  I 

'a       k 

H 

In  Figure  8,  let  Op„  Op„  Op^,  Op^  represent  prices  of 
gold  expressed  in  wheat,  /.  e.,  the  number  of  bushels  of 


204  MONE  y. 

wheat  for  which  an  ounce  of  gold  will  exchange  ;  and 
let  />jq„  />j^j,  p/jj,  p^q^  represent  the  quantity  annually 
used  in  the  arts  at  these  ratios.  Let  q,m„  q^n^  ^/'^j» 
q^m^  represent  the  part  of  the  annual  product  which  will 
be  needed  for  use  as  money  at  successive  prices.'  Finally, 
let  the  cost  of  mining  be  such  that,  at  the  successive 
prices,  the  quantities  normally  produced  will  be  repre- 
sented by  PjSj,  P3S2,  PjSj,  P^^.  Then  if  the  gold  is  used 
in  the  arts  alone,  the  normal  price  will  be  fixed  by  the 
intersection  of  the  curves  SjS_^  and  q,q^ ;  but  if  to  this 
there  be  superadded  a  use  as  money,  we  shall  have  a  new 
point  of  intersection  with  the  supply  curve  at  a  higher 
price  and  larger  quantity.  The  difference  in  marginal 
cost  of  production  (at  the  limit  to  which  it  is  profitable 
to  extend  mining  operations)  will  be  represented  by 
P^Pj',  the  total  quantity  produced  will  increase  from 
p^^  to  PjSy  Of  this  increased  product  there  will  be 
withdrawn  from  use  as  money  an  amount  Sjg^ ;  leaving 
the  amount  used  in  the  arts  Pjqj. 

§  227.  In  point  of  fact,  the  scarcity  of  gold,  so  severely 
felt  in  recent  years,  is  adjusting  itself  by  an  increase 
in  supply.  The  gold  production  of  the  world,  which  for 
a  number  of  years  (i  875-1 885)  did  not  vary  much  from 
five  million  ounces,  had  risen  in  the  year  1891  to  six 
million,  and  in  the  year  1893  to  more  than  seven  million. 
As  long  as  the  men  who  wanted  to  invest  in  mines 
thought  that  the  users  of  money  could  be  compelled  to 
take  the  metal  that  the  producers  desired  to  offer,  there 
was  a  tendency  to  mine  silver  rather  than  gold  ;  but  when 
it  became  evident  that  mining  was  to  stand  on  the  same 
footing  as  other  industries,  and  that  the  producers  must 
consult  the  consumers'  convenience  in  order  to  dispose  of 

'  This  may  take  the  form  of  a  negative  quantity  ;  that  is,  the  need  for 
gold  in  the  arts  may  rise  so  high  that  some  will  be  taken  from  the  stock  of 
money  left  over  from  past  years.  In  this  case  the  direction  of  many  of  the 
changes  described  in  this  paragraph  is  reversed. 


NORMAL    VALUE   OF  BULLION.  205 

their  product,  the  public  soon  began  to  get  what  it  wanted 
in  surprisingly  large  amounts.  If  this  process  continues 
the  present  very  low  price  level  can  be  only  temporary. 

§  228.  In  the  case  of  gold  bullion  or  any  other  form  of 
money  of  which  increasing  supplies  can  be  obtained  only 
at  increased  cost,  we  thus  have  a  double  equilibrium : 

1.  Between  the  marginal  utility  of  the  bullion  to  the 
man  who  can  just  afford  to  use  it  in  the  arts,  and  the 
marginal  utility  of  the  amount  of  commodities  purchased 
by  a  coin  of  corresponding  weight. 

2.  Between  the  cost  of  production  of  such  bullion  and 
the  cost  of  the  production  of  the  articles  for  which  the 
corresponding  amount  of  coined  money  is  exchanged. 

If  the  utility  of  the  bullion  is  temporarily  greater  than 
the  utility  of  the  articles  for  which  it  is  exchanged,  coin 
will  be  melted  down  and  converted  into  bullion.  If  it  is 
temporarily  less  than  that  of  the  articles  for  which  it  is 
exchanged,  bullion  will  be  taken  to  the  mint  for  conver- 
sion into  coin.  If  for  a  series  of  years  the  utility  of  the 
bullion  is  greater  than  that  of  the  articles  for  which  the 
corresponding  weight  of  coin  can  be  exchanged,  capital 
will  be  diverted  from  the  production  of  those  articles 
and  used  in  mining  gold.  In  the  converse  case,  capital 
will  be  withdrawn  from  gold  mining  and  devoted  to  other 
industrial  purposes. 

This  adjustment,  which  is  simply  an  application  of  the 
general  laws  of  normal  price  (§  100)  to  the  special  case  of 
gold,  furnishes  a  guarantee  against  sudden  changes  of 
ratio  between  gold  and  other  commodities.  If  the  gen- 
eral level  of  prices  goes  up  so  that  fewer  commodities  can 
be  bought  for  a  given  weight  of  gold,  the  resulting  con- 
version of  coin  into  bullion  will  diminish  the  quantity  of 
money  and  will  put  prices  down.  If,  on  the  other  hand, 
the  general  level  of  prices  goes  down,  and  more  com- 
modities can  be  bought  for  a  given  weight  of  gold,  the 
resulting  conversion   of  bullion    into  coin  will   increase 


206  MONEY. 

the  quantity  of  money  and  tend  to  put  prices  up.  If 
either  of  these  processes  continues  for  any  considerable 
length  of  time,  until  the  reserve  stocks  of  coin  have  been 
melted  into  bullion  or  until  the  reserve  stocks  of  bullion 
have  been  converted  into  coin,  the  effect  of  cost  of  pro- 
duction will  begin  to  come  into  play.  If  prices  continue 
high,  so  that  a  given  amount  of  gold  exchanges  for  a 
small  quantity  of  other  useful  things,  people  will  abandon 
gold  mining  and  produce  more  of  those  other  things.  If, 
on  the  other  hand,  prices  remain  low,  so  that  a  small 
quantity  of  gold  purchases  a  large  number  of  useful 
things,  people  will  increase  their  production  of  gold  and 
divert  capital  from  the  production  of  other  things  for  that 
purpose.  These  movements  will  make  the  change  in  the 
relative  value  of  gold  and  of  the  articles  which  gold  pur- 
chases a  slow  one,  and  will  give  time  for  contracts  to  be 
adjusted  to  any  slow  changes  which  may  take  place. 

That  which  holds  true  of  gold  in  this  respect  holds 
true  of  silver  or  copper  or  any  other  relatively  indestruc- 
tible commodity  which  is  subject  to  the  law  of  diminish- 
ing return  and  has  been  continuously  used  as  money  under 
a  free  coinage  system. 

§  229.  In  spite  of  these  adjustments,  there  is  always 
considerable  fluctuation  in  the  purchasing  power  of  coin. 
Enlarged  volume  of  business,  or  new  uses  for  the  metal 
in  the  arts,  may  increase  the  demand  for  the  metal  and 
make  its  value  go  up ;  improved  methods  of  doing  busi- 
ness on  credit  (chapter  viii)  or  new  developments  in  mining 
will  tend  to  increase  the  available  supply  of  the  metal  and 
make  its  value  go  down.  In  the  former  case  we  shall 
see  a  fall  in  the  general  price  level ;  in  the  latter  case, 
a  rise. 

Such  fluctuations  in  value  alter  the  relative  pOfsitions 
of  debtors  and  creditors.  If  prices  rise,  a  man  who  has  a 
debt  to  pay  can  accomplish  his  object  with  less  labor ; 
while  the  man  who  receives  the  payment  cannot  purchase 


THE    TABULAR   STANDARD.  20/ 

SO  many  things  with  the  money  which  he  has  received. 
If  prices  fall,  both  of  these  results  are  reversed.  In  the 
former  case,  injustice  may  be  done  to  the  creditor ;  in 
the  latter  case,  to  the  debtor. 

§  230.  Some  writers  propose  to  obviate  this  injustice 
by  a  plan  known  as  the  tabular  stan'dard.  They  would 
have  contracts  payable  in  coin,  as  they  now^  are ;  but  the 
amount  of  such  coin  for  which  the  creditor  might  call 
would  under  this  plan  depend  upon  the  price  level  at  the 
time  when  the  payments  became  due.  When  the  index 
number  rose  (/.  c.  when  the  purchasing  power  of  money 
fell)  the  amount  paid  should  be  larger ;  in  the  reverse 
case,  it  should  be  smaller.  It  is  argued  that  in  this  case 
all  the  demands  of  equity  would  be  fulfilled  ;  and  that 
we  could  use  our  present  money  as  a  medium  of  ex- 
change without  subjecting  ourselves  to  its  disadvantages 
as  a  basis  of  contracts. 

The  execution  of  this  plan  would  involve  considerable 
machinery.  In  the  first  place  we  should  have  to  obtain 
common  consent  as  to  the  table  of  commodities  which 
would  form  the  basis  of  the  standard  ;  and  in  tlie  next 
place  we  should  have  to  find  an  authority  that  could  be 
trusted  to  apply  it  with  intelligence  and  fairness  in  order 
to  say  just  what  had  been  the  change  in  purchasing 
power  on  the  basis  of  this  table.  This  is  extremely  diffi- 
cult to  do.  The  only  group  of  officials  which  has  the 
technical  knowledge  necessary  for  dealing  with  the  prob- 
lem is  connected  with  the  treasury  department.  But 
the  treasury  department  is  itself  habitually  a  very  large 
debtor,  and  its  awards  would,  justly  or  unjustly,  be  made 
the  objects  of  suspicion  and  criticism.  In  emergencies  it 
would  be  difficult  to  trust  to  their  impartiality.  Under 
these  circumstances,  the  uncertainty  attaching  to  the 
tabular  standard  makes  its  practical  usefulness  seem 
doubtful. 

§  231.  If  the  tabular  standard  is  considered  to  be  im- 


208  MONE  y. 

practicable,  there  is  often  an  apparent  conflict  of  interest 
between  debtors  and  creditors  in  the  choice  of  a  metal  to 
be  used  for  coinage.  The  creditors  believe  it  to  be  for 
their  advantage  to  insist  on  payment  in  the  dearer  metal. 
The  debtors  believe  that  it  is  for  their  interest  to  compel 
the  creditor  to  accept  payment  in  the  cheaper  metal  at  a 
ratio  fixed  by  the  authority  of  law ;  and  they  claim  that 
the  interest  of  the  community  in  these  matters  coincides 
with  that  of  the  debtor  classes. 

§  232.  A  policy  which  by  allowing  free  coinage  of  more 
than  one  metal  gives  the  debtor  the  chance  of  using  the 
cheaper  metal,  and  which  at  the  same  time  undertakes  to 
protect  the  creditor  by  keeping  both  metals  in  concur- 
rent or  at  any  rate  in  alternating  use,  is  known  as 
bimetallism. 

Some  of  the  agitation  in  favor  of  bimetallism  is  the  re- 
sult of  the  efforts  of  silver  mine  owners  who  seek  a 
market  for  their  product  on  more  favorable  terms  than 
they  can  command  at  present ;  and  some  is  connected 
with  an  unintelligent  demand  for  increase  in  quantity  of 
money  irrespective  of  its  quality.  But  there  are  several 
serious  arguments  for  the  attempt  to  maintain  the  two 
metals  in  concurrent  circulation  which  must  be  carefully 
examined  in  detail.' 

§  233.  It  is  urged  in  favor  of  such  a  policy,  that  it  dimin- 
ishes the  chance  of  fluctuations  in  the  value  of  money. 
Its  advocates  say  that  if  the  commercial  world  uses  but 
one  metal  as  money,  anything  which  greatly  affects  the 

'  The  reader  who  wishes  to  pursue  the  subject  of  bimetallism  more  fully 
than  it  is  treated  in  the  general  references  given  at  the  beginning  of  the 
chapter  will  find  a  mine  of  information  in  the  report  of  the  "Gold  and 
Silver  Commission"  of  1888  (Royal  Commission  appointed  to  inquire  intc> 
Changes  in  the  Relative  Value  of  the  Precious  Metals  1887-88)  with  accom- 
panying  documents. 

The  popular  discussions  of  the  silver  question  from  each  side  contain  so 
many  overstatements  and  even  mistakes  of  fact  that  they  are  generally  of 
little  use. 


ARGUMENTS  FOR  BIMETALLISM.  209 

production  of  that  metal  will  cause  a  large  proportionate 
increase  in  the  volume  of  coin  and  a  corresponding  rise  in 
prices ;  and  that  conversely,  if  its  use  in  the  arts  is 
increased  without  a  change  in  the  conditions  of  produc- 
tion, there  will  be  a  very  decided  scarcity  and  a  corre- 
sponding fall  in  prices.  If,  on  the  other  hand,  two 
metals  are  simultaneously  used  as  money,  a  change  in  the 
production  or  use  of  one  metal  alone  will  make  less  pro- 
portionate difference.  At  the  time  of  the  California  gold 
discoveries  there  was  a  large  stock  of  coin  added  to  the 
currency  of  the  world,  and  an  appreciable  rise  in  prices. 
How  much  greater  would  this  increase  have  been  had  the 
new  supplies  of  money  been  added,  not  to  an  existing  stock 
of  gold  and  silver  coin,  but  to  the  relatively  small  stock  of 
gold  alone  ?  The  comparatively  slight  effect  of  the  gold 
discoveries  in  California  and  Australia  is  cited  by  the 
advocates  of  bimetallism  as  an  instance  of  the  salutary 
action  of  their  principle.  Only  in  the  rather  improbable 
contingency  of  a  simultaneous  change  in  the  conditions  of 
production  and  use  of  the  two  metals  should  we  have  a 
disturbance  comparable  in  magnitude  with  that  to  which 
a  monometallic  world  is  daily  subject.' 

§  234.  The  bimetallists  further  emphasize  their  position 
by  pointing  out  the  evils  which  have  arisen  since  the  aban- 
donment of  the  policy  of  bimetallism  by  several  of  the 
leading  nations  of  the  world,  in  the  years  immediately  suc- 
ceeding 1870.     They  say  that  the  attempt  to  use  only  a 

^  A  few  years  ago  when  the  world  was  pretty  equally  divided  into  gold  and 
silver  using  countries,  a  nation  which  maintained  both  metals  in  concurrent 
circulation  gave  its  business  men  the  advantage  of  whatever  stability  in 
value  is  due  to  bimetallism,  in  a  very  tangible  form.  Being  able  to  export 
and  import  currency  freely  to  or  from  all  parts  of  the  world  with  which  it 
had  dealings,  such  a  country  not  only  protected  itself  against  fluctuations  in 
price,  but  protected  those  of  its  members  who  were  engaged  in  foreign 
trade  from  the  more  obvious  danger  of  fluctuations  in  exchange  (chapter  viii). 
But  so  few  countries  now  have  free  coinage  of  silver  that  this  argument  for 
bimetallism  has  lost  much  of  its  force. 


2IO  MONEY. 

single  metal  has  caused  an  actual  contraction  of  the  cur- 
rency; that  the  use  of  gold  in  the  arts  is  so  great  that 
the  additions  to  the  world's  stock  of  coin  are  inadequate 
to  maintain  the  old  price  level  and  properly  meet  the 
wants  of  existing  business.  They  attribute  the  series  of 
severe  industrial  depressions  during  the  last  twenty-five 
years  to  a  decline  in  prices  directly  consequent  upon  the 
abandonment  of  bimetallism.  They  show  that  many  of 
the  staple  commodities  have  fallen  in  price  concurrently 
with  the  fall  in  silver.  They  claim  that  the  gold  currency, 
which  is  now  the  only  available  basis  of  contracts,  has 
appreciated ;  that  each  unit  of  money  will  purchase  more 
commodities  ;  and  conversely,  that  an  increased  amount 
of  commodities  is  required  in  order  to  fulfil  an  agreement 
which  has  been  made  in  terms  of  money.  A  contract 
which  calls  for  the  payment  of  a  hundred  dollars  or  a 
hundred  pounds  sterling  in  return  for  past  services,  puts 
the  man  who  pays  the  money  in  a  worse  position,  and 
the  man  who  receives  it  in  a  better  position,  than  was 
contemplated  at  the  time  those  services  were  rendered. 
Every  man  who  borrowed  money  with  the  expectation 
of  producing  commodities  as  a  means  of  paying  his  debts 
finds  himself  in  worse  financial  circumstances  than  he  had 
any  reason  to  expect.  The  result  has  been  a  loss  to  the 
debtor  and  a  gain  to  the  creditor,  a  loss  to  the  active  busi- 
ness man  and  a  gain  to  the  one  who  sits  quietly  at  home 
and  receives  interest.  The  bimetallists  urge  that  this  loss 
is  at  once  unjust  and  destructive  ;  unjust  as  between  man 
and  man,  destructive  to  the  active  prosecution  of  business 
enterprise  throughout  the  community. 

§  235.  They  also  urge — and  this  is  in  some  respects 
their  strongest  argument — that  a  slowly  depreciating  cur- 
rency is  better  than  a  slowly  appreciating  one.  We  have 
seen  how,  in  the  present  tendency  toward  under-consump- 
tion,  the  contraction  of  expenditure  for  the  sake  of 
profits  which  are  expected  but  not  always  realized  forms 


T 


FALL  IN  PRICES  NOT  UNIVERSAL.  211 

a  source  of  danger  to  the  community ;  and  how,  for  the 
moment  at  any  rate,  an  inflation  of  the  currency  may  con- 
tribute to  the  better  utilization  of  national  capital  by 
increasing  national  consumption.  The  bimetallist  claims 
that  a  slowly  depreciating  currency  maintains  this  health- 
ful process  without  the  reaction  which  follows  reckless  in- 
flation ;  and  that  an  appreciating  currency,  such  as  gold 
appears  to  be,  intensifies  all  the  evils  incident  to  the 
modern  passion  for  over-investment.' 

§  236.  To  these  charges  the  monometallist  replies,  in 
the  first  place,  by  denying  most  of  the  allegations  of  the 
bimetallist  concerning  the  amount  of  appreciation  of  gold. 
He  can  show  that  the  fall  in  prices  chiefly  affects  those 
articles  where  new  processes  have  economized  the  labor 
of  production  and  distribution.  He  can  point  out  many 
commodities  which  have  fallen  but  little  and  a  number 
that  have  actually  risen.  The  articles  which  have  most 
conspicuously  fallen  in  price  belong  to  two  classes:     (i) 

'  Besides  these  ailments  there  are  two  sentiments  working  in  favor  of 
bimetallism,  which  it  will  not  do  to  leave  unnoticed.  One  is  the  feeling 
that  the  debtor  is  more  deserving  of  sympathy  and  assistance  than  the  cred- 
itor. The  creditor  is  pictured  as  a  rich  financier  living  on  the  income  which 
he  draws  from  the  struggling  debtor.  In  point  of  fact,  the  financiers  are 
apt  to  be  debtors  quite  as  much  as  creditors.  They  hold  relatively  large 
quantities  of  stock,  as  compared  with  bonds  ;  their  advocacy  of  the  gold 
standard  arises  from  the  fact  that  it  enables  them  to  borrow  money  at  lower 
rates  of  interest  and  in  larger  quantities.  The  chief  creditor  classes  of  the 
community  are  the  people  who  live  upon  past  savings — not  usually  in  very 
large  amounts, — the  holders  of  life  insurance,  and  above  all  the  receivers  of 
salaries  and  wages.  To  deem  the  debtors  worthy  of  encouragement  at  the 
expense  of  these  classes  is  to  put  a  premium  on  economic  recklessness. 

The  other  sentiment  is  connected  with  the  feeling  that  silver  mining  is  an 
industry  which  has  not  been  very  profitable  and  that  it  ought  to  be  helped. 
The  claim  is  gravely  made  that  371  grains  of  silver  really  costs  as  much  as  23. 2 
grains  of  gold  and  that  therefore  we  ought  to  pay  as  much  for  it.  But  if 
consumers  do  not  want  an  article,  the  high  cost  is  a  reason  against  stimu- 
lating its  production,  and  the  theory  that  a  man  may  use  the  power  of  the 
government  to  compel  people  to  buy  a  thing  they  do  not  want  at  the  price 
which  it  has  cost  him,  is  socialism  of  the  extremest  type. 


2 1 2  MONE  y. 

Products  like  steel  or  sugar,  in  whose  preparation  there 
have  been  marked  improvements  during  the  period  in 
question,  enabling  a  given  number  of  producers  to  in- 
crease their  output  and  compelling  as  well  as  justifying  a 
fall  in  price.  (2)  Products  like  wheat,  whose  improved 
transportation  facilities  have  greatly  widened  the  area 
from  which  trade  centres  could  draw  their  supplies,  and 
have  increased  the  intensity  of  competition  between 
different  producers.  Where  one  or  the  other  of  these 
causes  has  not  been  conspicuously  present,  prices  have 
been  quite  as  apt  to  rise  as  to  fall.  We  see  this  exempli- 
fied in  goods  which  are  mostly  consumed  at  home,  like 
eggs ;  in  goods  in  which  there  is  little  international  com- 
petition, like  corn ;  and  even  in  goods  which  form  the 
subject  of  international  trade,  like  india-rubber,  in  case 
there  have  been  no  new  sources  of  supply  or  methods  of 
economizing  labor, 

§  237.  He  can  also  show  that  the  recent  years  of  falling 
prices  were  preceded  by  a  corresponding  period  of  rising 
prices,  and  can  claim  that  the  injustice  to  debtor  classes  for 
twenty  years  succeeding  1873  was  but  an  offset  to  a  cor- 
responding injustice  to  creditors  before  that  time.  In 
point  of  fact,  the  amount  of  such  injustice  either  way  is 
very  much  less  than  would  appear  from  looking  at  the 
figures  of  the  prices  alone.  For  in  times  of  advancing 
prices  a  part  of  the  loss  to  the  creditor  was  offset  by 
an  increase  in  the  interest  rate.  As  prices  rose,  interest 
rose.  Most  of  the  contracts  for  the  payment  of  interest 
were  terminable  at  short  enough  periods  for  the  creditor 
to  indemnify  himself  by  increased  interest  charges  for  any 
probable  depreciation  of  his  principal.  Conversely,  when 
prices  began  to  fall,  interest  fell  also.  The  burden  upon 
the  debtor  due  to  the  realization  of  lower  prices  for  his 
product  was  in  very  considerable  measure  offset  by  the 
possibility  of  borrowing  capital  at  lower  interest  rates. 

§  238.  The  monometallist  further  claims  that  even  if  the 


T 


EQUITY  OF  BIMETALLISM  QUESTIONED.  213 

prices  of  many  important  staples  have  moved  concurrently 
with  that  of  silver,  the  price  of  labor  has  maintained 
a  more  nearly  constant  ratio  to  that  of  gold.  He  urges 
that  the  demands  of  justice  are  better  satisfied  if  the  dis- 
charge of  a  debt  requires  a  fixed  amount  of  labor  than  if  it 
requires  a  fixed  amount  of  commodities.  The  question 
of  equity  in  his  mind  resolves  itself  into  this :  Must  a 
man  do  more  work  to  pay  a  debt  than  he  would  have  had 
to  do  at  the  time  when  that  debt  was  contracted  ?  If 
this  is  the  case,  there  is  a  hardship  to  the  debtor ;  if  this 
is  not  the  case,  he  suffers  no  hardship.  The  debtor  was 
not  borrowing  a  certain  amount  of  comfort  from  the 
creditor.  He  was  borrowing  a  certain  amount  of  control 
of  labor.  Of  that  labor  and  its  products  he  has  had  the 
use  during  the  period  stipulated.  Even  if  he  is  compelled 
to  sell  the  commodities  which  are  the  results  of  that  labor 
at  lower  rates  than  he  expected,  because  of  the  increased 
efficiency  in  production  which  the  rest  of  the  producing 
world  enjoys  in  common  with  him,  this  was  a  risk  which 
he  might  have  foreseen  and  expected  when  he  contracted 
the  debt.  The  over-production  of  goods  at  unremunera- 
tive  prices  was  the  very  thing  which  he  as  a  business  man 
should  have  taken  care  to  avoid.  That  he  failed  to  fore- 
see it  and  to  avoid  it  indicates,  not  a  defect  in  the  mone- 
tary system,  but  an  over-sanguine  temperament  on  the 
part  of  the  individual  speculator  or  group  of  speculators. 
§  239.  The  monometallist  rejects  the  theory  that  two 
metals  will  necessarily  be  more  stable  than  one.  All 
depends  upon  the  metal  in  question.  There  is  at  most  a 
slight  a  priori  probability  in  favor  of  the  concurrent  use 
of  two  metals  if  it  can  be  proved  practicable.  But  the 
gold  monometallist  urges  that  any  argument  based  upon 
this  a  priori  probability  is  completely  overthrown  by  the 
facts  concerning  silver  mining  in  recent  years.  Even 
admitting  what  may  be  plausibly  claimed  as  to  the 
appreciation  of  gold,  the  monometallist  urges  that  this  is 


214  MONEY. 

far  less  conspicuous  than  the  depreciation  of  silver.  The 
marginal  cost  of  gold  has  gone  up  a  little :  that  of  silver 
has  gone  down  a  great  deal.  The  attempt  to  maintain 
bimetallism  would  have  resulted  in  a  rapidly  depreciating 
standard  with  all  the  evils  of  over-speculation  incident 
thereto  ;  and  this  would  have  been  a  far  worse  state  than 
that  in  which  the  commercial  world  at  present  finds  itself. 

§  240.  He  denies  that  the  evil  secondary  results  which 
follow  quick  inflation  are  avoided  by  a  slow  and  continu- 
ous process  of  depreciation.  They  do  not  come  so  soon  ; 
but  in  his  opinion  they  come  just  as  surely.  For  while 
prices  are  gradually  advancing,  the  more  reckless  specula- 
tors come  into  control  of  business  by  offering  high  rates 
of  interest  which  they  cannot  pay  unless  the  deprecia- 
tion of  the  currency  is  still  further  continued.  There  is 
then  sure  to  be  a  gradual  over-production  of  machinery 
under  circumstances  which  make  its  permanent  useful- 
ness out  of  the  question.  Such  a  condition  was  reached, 
the  whole  world  over,  in  1873,  when  the  depreciation  of 
gold  reached  its  extreme.  The  monometallfst  claims 
that  the  severity  of  the  depression  that  followed  was 
not  so  much  a  direct  result  of  contraction,  as  an  in- 
evitable secondary  effect  of  the  expansion  which  had 
preceded  ;  one  which  the  demonetization  of  silver  may 
at  most  have  intensified,  but  for  which  it  cannot  be  held 
responsible  as  the  cause. 

§  241.  But  the  monometallist  has  a  stronger  argument 
than  any  of  these.  He  claims  that  the  maintenance  of 
bimetallism  is  impracticable  under  any  of  the  plans  pro- 
posed by  its  advocates,  and  extremely  doubtful  under  any 
plan  whatsoever ;  so  much  so  that  the  uncertainty  attach- 
ing to  the  future  of  a  bimetallic  currency  would  make  it 
an  extremely  bad  one  to  adopt. 

We  may  make  three  distinct  suppositions  as  to  the  con- 
ditions under  which  bimetallism  is  attempted  : 

I.  When  the  ratio  chosen  for  the  coinage  of  two  metals 


COINAGE  AND  MARKET  RATIOS.  21 5 

is  exactly  the  market  ratio  of  the  price  of  the  two  metals 
at  the  time.  If  an  ounce  of  gold  sells  at  the  same  rate  as 
a  pound  of  silver,  the  nation  which  coins  each  of  these 
two  metals,  putting  sixteen  times  as  many  grains  of  silver 
into  the  silver  dollar  as  it  puts  grains  of  gold  into  the  gold 
dollar,  will  probably  have  a  considerable  amount  of  both 
metals  brought  to  its  mint.  But  it  is  improbable  that  this 
exact  ratio  of  bullion  value,  independent  of  the  operation 
of  coinage  laws,  will  be  maintained  for  a  long  time  ;  since 
anything  which  affects  the  conditions  of  production  or 
consumption  of  either  metal  is  liable  in  some  degree  to 
disturb  it. 

2.  If  the  ratio  adopted  is  near  the  market  ratio  of  the 
bullion  price  of  the  two  metals,  though  not  absolutely 
coincident  with  it,  their  concurrent  circulation  may  still 
be  maintained.  If,  apart  from  any  attempt  at  bimetallism 
an  ounce  of  gold  would  exchange  for  16^  ounces  of  silver 
instead  of  16,  it  might  readily  happen  that  the  opening 
of  the  mints  of  a  large  nation  or  group  of  nations  to  the 
free  coinage  of  silver  at  a  ratio  of  i  to  16  would  so 
change  the  conditions  of  demand  and  supply  of  the  two 
metals  as  to  make  their  bullion  value  conform  to  the 
coinage  ratio.  For  if  twenty  million  dollars  of  silver 
were  coined  yearly  under  the  operations  of  such  an  act, 
twenty  million  dollars'  worth  of  gold  which  would  other- 
wise have  been  needed  for  coinage  would  be  set  free  for 
use  in  the  arts.  To  call  forth  a  demand  for  this  addi- 
tional twenty  million  dollars  of  gold  buillion,  some  people 
must  be  induced  to  use  it  under  the  new  conditions  who 
would  not  have  done  so  under  the  old  ;  a  result  which  can 
only  be  accomplished  by  a  slight  fall  in  the  ratio  at  which 
it  is  exchanged  for  other  commodities.  On  the  other 
hand,  the  increased  monetary  demand  for  silver  would  at 
first  cause  withdrawals  of  silver  from  use  in  the  arts.  This 
would  mean  that  those  who  now  wanted  the  silver  would 
have   to  pay  a  little  higher  price  to  get  it.     This  price 


2l6  MONEY. 

would  stimulate  an  increased  production,  but  additions  to 
the  product  being  subject  to  the  law  of  the  diminishing 
return  could  only  be  obtained  at  an  expenditure  of  a 
little  more  labor  per  unit  of  product.  If  the  labor,  and 
other  elements  of  expense,  needed  for  the  units  of  added 
product  were  appreciably  greater  than  that  by  which  the 
old  demand  for  silver  had  been  supplied,  this  disadvan- 
tage would  soon  put  a  stop  to  increased  production  from 
the  mines,  and  the  price  of  silver  would  be  permanently 
raised  by  the  additional  demand  for  coinage  purposes. 
Meantime,  the  increased  supplies  of  gold  set  free  for  use 
would  have  made  gold  mining  less  profitable,  would  have 
thrown  some  gold  mines  out  of  use,  and  would  have  left 
in  operation  only  those  where  the  cost  per  unit  of  pro- 
duct was  less.  Under  those  circumstances  we  should 
have  a  new  ratio  between  silver  and  gold,  where  more 
silver  was  demanded  and  produced  at  slightly  higher 
marginal  cost,  where  less  gold  was  demanded  and  pro- 
duced at  slightly  lower  marginal  cost,  and  where  the  final 
ratio  of  such  cost  would  be  i6  to  i  instead  of  i6^  to  i. 

The  effective  operation  of  this  process  depends  upon 
the  power  of  the  nations  which  adopt  bimetallism  to  take 
a  sufficient  quantity  of  silver,  year  after  year,  to  raise 
the  marginal  cost  of  production  without  driving  gold 
wholly  out  of  use  as  money.  If  the  annual  demand  of 
such  nations  for  currency  is  small,  or  if  the  amount  of 
additional  silver  which  can  be  produced  at  a  slight  ad- 
vance in  price  is  large,  the  experiment  fails.  The  greater 
the  quantity  of  silver  which  the  nations  that  strive  to 
maintain  bimetallism  can  absorb  annually,  the  better  are 
the  prospects  of  success.  The  greater  the  amount  which 
miners  stand  ready  to  produce  at  a  moderate  advance  in 
price,  the  larger  are  the  chances  of  failure. 

The  power  of  legislation  to  influence  the  demand  for 
the  precious  metals  is  on  the  whole  surprisingly  small. 
People  will  demand  a  metal  for  coinage  whose  bulk  makes 


i 


OBSTACLES   TO  BIMETALLISM.  21/ 

it  convenient  to  handle.  If  their  transactions  are  small 
they  may  use  copper  as  a  standard.  As  they  buy  and  sell 
more  they  will  use  silver.  When  their  business  is  very 
large,  they  will  prefer  gold.  Consequently  the  relative 
value  of  the  cheaper  metals  tends  to  fall  as  the  amount 
of  coin  in  use  becomes  larger.'  In  eastern  countries  the 
ratio  of  value  of  gold  to  silver  has  been  as  low  as  four  to 
one.  In  Europe  in  the  middle  ages  it  was  in  the  neigh- 
borhood of  twelve  to  one.  For  the  greater  part  of  the 
nineteenth  century  it  was  fifteen  and  a  half  to  one.  With 
the  development  of  new  mines  and  new  processes  since 
1870  it  has  risen  as  high  as  thirty-two  to  one.  This 
change  of  ratio  has  been  accentuated  by  the  action  of  a 
number  of  governments  in  abandoning  the  attempt  to 
keep  gold  and  silver  in  concurrent  circulation.  But  there 
is  no  proof — in  fact,  there  is  a  decided  absence  of  prob- 
ability— that  the  various  governments  could  have  suc- 
ceeded in  maintaining  the  old  ratio  if  they  had  tried  to 
do  so." 

3.  Where  the  ratio  chosen  for  coinage  is  far  from  the 
market  ratio  of  the  bullion  the  failure  of  any  attempt  to 
maintain  bimetallism  is  certain.  The  difference  between 
this  case  and  the  preceding  one  may  be  made  clear  by  a 

*  If  two  metals  are  in  concurrent  use,  an  increase  in  the  supply  of  the 
dearer  metal,  by  increasing  the  amount  of  coin,  lessens  the  monetary  utility 
of  the  cheaper  metal,  and  makes  but  a  slight  change  in  the  ratio  of  value — 
witness  the  trifling  effect  of  the  periods  of  large  gold  discovery.  On  the 
other  hand,  an  increase  in  the  supply  of  the  cheaper  metal  increases  the 
monetary  utility  of  the  dearer  metal  and  makes  a  great  change  in  the  ratio — 
witness  the  great  effect  of  the  silver  discoveries  in  the  seventeenth  century, 
when  there  was  no  legislative  discrimination  against  that  metal.  An 
increased  supply  of  gold  means  diminished  demand  for  silver,  and  a 
parallel  movement  of  value  of  the  two  metals.  An  increased  supply  of 
silver  means  increased  demand  for  gold,  and  a  divergent  movement  of  value 
of  the  two  metals. 

*  The  quantity  of  silver  coined  in  some  of  the  recent  years  has  been 
greater  than  at  any  previous  time  in  the  world's  history,  but  has  not  sufficed 
to  create  a  demand  for  the  product  of  the  mines  at  anything  like  the  old 
prices. 


2l8  MONEY. 

concrete  illustration.  If  it  takes  \^\  days' labor  to  pro- 
duce a  pound  of  silver  and  i6^  days'  labor  to  produce 
an  ounce  of  gold,  a  country  which  has  several  hundred 
millions  of  gold  and  proceeds  to  make  purchases  of  silver 
at  i6  to  I  can  so  increase  the  quantity  of  silver  demanded 
and  diminish  the  quantity  of  gold  demanded,  that  the 
marginal  cost  of  the  pound  of  silver  and  the  ounce  of 
gold  will  soon  become  equal ;  but  if  it  takes  12  days'  labor 
to  produce  a  pound  of  silver  and  20  days'  labor  to  pro- 
duce an  ounce  of  gold,  no  amount  of  regulation  is  likely 
to  make  the  12  days'  labor  command  a  price  equal  to  that 
of  the  20  days'  labor.  The  most  that  can  be  expected  is 
that  a  supplementary  demand  for  the  products  of  the  12 
days'  labor  should  increase  their  selling  price  to  a  point 
represented  by  13  or  possibly  14  days'  labor,  and  that  a 
reduction  of  demand  for  the  products  of  the  20  days* 
labor  should  lower  their  selling  price  to  a  point  repre- 
sented by  19  or  18  days'  labor.  But  we  should  still  be 
far  from  reaching  an  equality  of  value  or  concurrent  use 
of  the  two  metals  as  coin  at  the  ratio  of  16  to  i.  Even  if 
the  whole  world  should  adopt  a  ratio  of  16  to  i  under 
those  conditions  of  production,  the  chance  of  a  successful 
issue  of  such  a  policy  would  be  extremely  problematical. 
It  is  more  than  likely  that  the  whole  gold  product  of  the 
world  could  be  used  in  the  arts,  leaving  silver  alone  to  per- 
form the  functions  of  money,  without  so  far  lowering  the 
demand  for  gold  and  increasing  that  for  silver  as  to  make 
their  price  ratio  as  low  as  16  to  i. 

§  242.  When  the  coinage  ratio  for  one  or  more  coun- 
tries is  fixed  so  far  from  the  commercial  ratio  as  to  pre- 
vent the  use  of  more  than  one  metal,  we  have  nominal 
and  not  real  bimetallism.  Gresham's  Law  comes  into 
operation.  The  less  valuable  metal  is  brought  to  the 
mint  to  be  coined  and  used  in  paying  debts  ;  the  more 
valuable  one  is  exported  or  used  in  the  arts  for  the  sake 
of  its  bullion  value. 


BIMETALLISM  IN  FRANCE.  219 

§  243.  The  most  important  case  where  free  coinage  of 
two  metals  was  successfully  maintained  was  in  France 
in  the  first  half  of  the  present  century.  The  conditions 
were  favorable  for  such  an  experiment.  Production  of 
both  gold  and  silver  was  slow  and  equable.  There  was  no 
likelihood  of  sudden  changes,  either  in  demand  or  in  sup- 
ply. The  French  financiers  saw  that  the  normal  commer- 
cial ratio  of  the  two  metals  under  the  conditions  of  use 
then  existing  was  such  that  1 5^  ounces  of  silver  exchanged 
for  one  ounce  of  gold.  In  1803  this  was  adopted  as  the 
ratio  at  which  the  French  mint  would  coin  either  metal.* 
For  nearly  fifty  years  this  policy  was  successfully  main- 
tained. If  for  a  time  the  price  of  silver  rose,  gold 
was  taken  to  the  French  mint  ;  if  the  price  of  gold  rose, 
silver  was  taken  to  the  French  mint.  The  causes  for 
such  fluctuations  were  so  slight  that  a  moderate  amount 
of  coinage  of  one  or  the  other  metal  was  sufficient  to 
exercise  a  very  decided  compensating  action.  But  in 
1850,  when  the  California  gold  discoveries  came  into 
effect,  there  was  a  distinct  fall  in  the  price  of  gold,  due  to 
its  increased  production.  Silver  ceased  to  be  coined  by  the 
French  mint,  not  on  account  of  any  change  in  the  law, 
but  from  a  change  in  the  commercial  conditions.  In 
order  to  preserve  its  stock  of  fractional  silver  unim- 
paired, (§  211),  the  French  Government  had  to  reduce  the 
amount  of  metal  in  its  smaller  coins,  which  it  did  by  in- 
creasing the  proportion  of  alloy,  the  weight  of  the  coins 
remaining  the  same.  At  about  this  time  (1865)  Belgium, 
Switzerland,  and  Italy,  whose  coinage  systems  resembled 
that  of  France,  joined  with  her  in  forming  the  Latin  Union, 
which  has  been  cited  as  a  most  conspicuous  example  of 
successful  bimetallism.  As  a  matter  of  fact,  the  success  of 
the  bimetallic  experiment  was  ended  before  the  Latin 
Union  was  formed.     The  bimetallism  of  the  Latin  Union 

'  This  was  only  the  re-adoption  of  a  ratio  which  had  been  established 
in  1785. 


220  MONE  Y. 

was  nominal,  and  not  actual.  The  great  bulk  of  the  free 
coinage  under  the  Latin  Union  has  consisted  of  gold  ; 
the  silver  coined  under  its  auspices  has  almost  all  been 
subsidiary. 

Had  the  cheapness  of  gold  continued,  it  is  highly  prob- 
able that  the  nominal  bimetallism  of  the  Latin  Union 
might  have  .been  indefinitely  maintained ;  but  as  the 
Californian  and  Australian  gold  fields  became  somewhat 
exhausted  and  new  sources  of  supply  of  silver  came  into 
play,  the  relative  price  of  gold  rose,  and  that  of  silver  fell 
correspondingly.  People  began  to  take  silver  to  the 
mints  instead  of  gold.  This  change  was  not  regarded 
with  the  equanimity  with  which  the  authorities  had 
seen  the  substitution  of  gold  for  silver.  It  was  in  fact  a 
change  from  a  metal  which  was  convenient  for  use  in  large 
transactions  to  one  which  was  extremely  inconvenient. 
Just  as  France  in  1864  had  taken  measures  to  preserve 
her  silver  for  use  in  small  transactions,  she  now  took 
pains  to  preserve  her  gold  for  use  in  large  transactions, 
not  of  course  by  diminishing  the  number  of  grammes  of 
gold  in  a  twenty-franc  piece,  but  by  limiting  the  amount 
of  silver  which  she  was  prepared  to  coin.  The  example 
of  France  was  followed  with  more  or  less  hesitation  by 
other  states  in  the  Latin  Union,  and  in  1876  the  prin- 
ciple of  bimetallism  was  abandoned  in  name  as  it  had 
been  twenty  years  earlier  in  fact. 

§  244.  The  other  great  series  of  experiments  in  bimetal- 
lism was  made  in  the  United  States.  By  the  coinage  act 
of  1792  the  United  States  offered  to  coin  both  silver  and 
gold.  Our  financiers  were,  however,  less  successful  in 
their  judgment  of  the  probable  commercial  value  of  the 
two  metals  than  the  French  authorities,  and  fixed  the  ratio 
at  15  to  I,  making  the  dollars  contain  either  371.25  grains 
of  pure  silver  or  24.75  grains  of  pure  gold.  But  24|-  grains 
of  gold  bullion  was  worth  more  in  the  world's  markets 
than  371  grains  of  silver  bullion.     Where  the  two  things 


BIMETALLISM  IN  AMERICA.  221 

had  the  same  debt-paying  power,  it  was  advantageous  to 
use  the  371  grains  of  silver  for  paying  debts  and  to  sell 
the  gold  for  export  or  for  use  in  the  arts.  We  had  practi- 
cally nothing  but  silver  in  use  as  coin.  This  state  of 
things  continued  until  1834,  when  the  desirability  of 
using  gold  for  large  transactions  was  felt,  and  the  coin- 
age law  was  so  amended  as  to  make  the  ratio  16  to  i  in- 
stead of  1 5  to  r,  by  changing  the  weight  of  gold  in  a  dollar 
from  24f  grains  to  2 3y2^.  This  overdid  the  matter.  While 
24I  grains  of  gold  had  been  worth  more  than  371  grains  of 
silver,  23-3^  grains  of  gold  was  worth  less  than  371  grains 
of  silver.  It  was  far  preferable  to  take  gold  to  be  coined 
and  sell  the  silver  either  for  use  in  the  arts  or  for  export. 
This  took  place  to  such  a  degree  that  in  order  to  preserve 
its  subsidiary  currency  the  United  States  was  compelled 
to  do  what  France  did  some  years  later.  It  reduced  the 
amount  of  silver  in  its  fractional  coins  in  order  to  pre- 
vent export,  and  maintained  their  value  by  limiting  their 
issue.  From  1853  to  1873  we  had  nominal  bimetallism, 
but  in  fact  the  silver  was  so  over-valued  that  few  silver 
dollars  were  coined,  and  practically  none  went  into  actual 
circulation  in  the  United  States. 

§  245.  In  1873  the  free  coinage  of  silver  was  abolished. 
This  action  seemed  to  have  little  importance  at  the  time, 
particularly  as  the  United  States  was  using  neither  silver 
nor  gold  dollars,  but  paper  ones;  these  being  worth  much 
less  than  coined  dollars  of  either  kind.  But  in  the  years 
immediately  following,  the  increased  production  of  silver 
made  the  price  of  silver  bullion  fall  until  371  grains 
of  silver  were  cheaper  than  a  paper  dollar.  Under  such 
circumstances  there  was  a  loud  demand  for  the  reenact- 
ment  of  the  law  permitting  people  to  take  their  silver  to 
the  mint  and  have  it  coined.  This  demand  was  urged 
both  by  the  silver  producers,  who  wished  a  market  for 
their  product,  and  by  the  debtors,  who  wished  an  inflation 
of  the  currency.     They  were  not  strong  enough  to  put 


222  MONEY. 

tReir  wishes  into  effect,  but  succeeded  (1878)  in  securing  the 
passage  of  a  measure  known  as  the  Bland  Act,  by  which 
the  United  States  purchased  and  coined  two  million  dol- 
lars' worth  of  silver  per  month,  the  seigniorage  on  the 
transaction  accruing  to  the  advantage  of  the  government. 
There  was  a  discretionary  power  given  to  the  Secretary 
of  the  Treasury  to  purchase  twice  this  amount,  but  it  was 
never  exercised. 

The  Bland  Act  disappointed  the  expectations  both  of 
its  advocates  and  of  its  opponents.  It  did  not  create  a 
sufficient  demand  for  silver  to  keep  the  price  from  fall- 
ing, as  its  advocates  had  hoped.  On  the  other  hand, 
it  did  not  prevent  the  use  of  gold  currency,  as  its 
opponents  had  feared.  The  United  States  was  in  a 
strong  financial  position,  both  as  a  people  and  as  a  gov- 
ernment. It  demanded,  for  use  in  its  expanding  trade, 
an  increase  in  currency  of  more  than  two  million  or  even 
three  million  dollars  a  month,  so  that  it  was  able  to  absorb 
into  its  circulation  the  whole  amount  of  silver  coined 
under  the  Bland  Act,  without  in  the  least  crowding  gold 
out  of  use.  The  government  also  had  so  large  a  surplus 
that  it  was  able  to  make  the  necessary  purchases  without 
impairment  of  its  gold  reserves. 

§  246.  Twelve  years  later  the  silver  men  were  strong 
enough  to  secure  the  passage  of  a  more  sweeping  act  than 
the  Bland  law.  This  was  known  as  the  Sherman  Act  of 
1890.  It  provided  for  the  purchase  of  four  and  one- 
half  million  ounces  of  silver  a  month,  by  an  issue  of 
treasury  notes  equal  in  amount  to  the  bullion  value  of 
the  silver  thus  purchased.  It  was  hoped  by  the  friends 
of  the  measure  that  the  increased  amount  of  silver  pur- 
chased would  send  the  price  of  the  product  up,  and  that 
notes  based  on  the  bullion  value  of  the  silver  at  the  time 
of  the  purchase  would  be  secured  by  a  reserve  sufficient 
to  protect  the  government  against  loss  and  the  currency 
against  depreciation.     Had  silver  not  fallen  in  price  these 


PURCHASES  OF  SILVER.  223 

expectations  would  perhaps  have  been  fulfilled.  But  me 
actual  working  of  the  measure  was  far  from  being  satis- 
factory to  any  one.  A  temporary  rise  in  the  price  of  sil- 
ver brought  new  mines  into  use  and  caused  a  speculative 
over-production  of  silver,  which  made  the  price  fall  lower 
than  it  had  ever  done  before.  When  the  Sherman  Act 
was  passed  the  selling  price  of  an  ounce  of  silver  was  -^-^ 
of  that  of  an  ounce  of  gold.  Three  years  later  it  had 
fallen  to  -^.  Meantime,  the  additional  purchases  were  a 
burden  both  to  the  country  and  to  the  government.  The 
country  had  been  able  to  absorb  two  million  dollars'  worth 
of  silver  coin  monthly  without  crowding  out  gold.  It  was 
not  able  to  absorb  a  much  larger  amount,  especially  under 
the  adverse  financial  conditions  that  followed.  Nor  were 
the  revenues  of  the  government  adequate  to  make  the  pur- 
chases out  of  surplus  income.  Extravagant  appropriations 
had  so  completely  destroyed  the  disposable  funds  that  the 
payments  under  the  Sherman  Act  were  accompanied  by  a 
reduction  of  the  gold  reserves  in  the  treasury.  In  1893  the 
supply  of  silver  currency  in  the  country  had  nearly  reached 
the  limit  of  the  demand  for  such  currency  ;  partly  because 
of  the  increase  in  the  supply  itself,  partly  because  the  peo- 
ple began  to  distrust  it  to  such  a  degree  that  they  were 
making  gold  contracts  and  using  gold  reserves  for  many  of 
the  needs  of  commercial  life.  Nor  was  the  government 
in  a  position  to  maintain,  by  force  of  the  treasury  reserve, 
an  equilibrium  which  had  become  so  precarious.  Relief 
was  barely  obtained  by  the  repeal  of  the  Sherman  Act 
and  a  return  to  gold  monometallism. 

The  experience  under  the  Sherman  Act  is  extremely 
valuable  as  showing  how  little  is  the  chance  of  increasing 
the  market  price  of  silver  by  its  forced  use  as  currency. 
During  recent  years  the  world's  coinage  of  silver  has  been 
large,  but  the  increased  production  has  been  so  great 
as  to  outrun  the  monetary  demand.  The  Sherman  Act 
proved  beyond  a  doubt  that  the  United  States  would  be 


224  MONEY. 

vmoWy  unable  to  maintain  bimetallism  at  i6  to  i,  or  any 
ratio  approximating  to  this  figure.' 

§  247.  Those  who  see  the  impracticability  of  bimetallism 
at  a  fixed  ratio,  on  account  of  uncertainty  in  the  volume 
of  silver  production,  but  who  at  the  same  time  deplore 
the  contraction  of  the  currency  which  they  believe  to  be 
incident  to  the  adoption  of  gold  monometallism,  have 
several  plans  to  propose  : 

1.  Free  coinage  at  shifting  ratios,  to  be  determined 
from  time  to  time  as  the  conditions  of  the  market  may 
change. 

The  practical  difficulties  connected  with  the  execution 
of  this  plan  are  very  great.  It  would  make  a  complicated 
currency  system  instead  of  a  simple  one,  and  would  offer 
government  authorities  a  constant  temptation  to  meddle 
with  the  currency  to  their  own  advantage  and  to  the  dis- 
advantage of  others.  If  an  attempt  were  made  to  regu- 
late these  matters  by  international  agreement,  the  friction 
attendant  upon  the  operation  of  such  agreements  would 
inevitably  be  very  great. 

2.  Large  coinage  of  silver  by  a  number  of  nations  to 
supplement  any  deficiency  in  the  gold  supply,  the  issue 
of  such  silver  being  limited  by  statute  to  an  amount 
which  would  not  drive  gold  wholly  out  of  circulation. 

This  was  practically  the  position  of  the  United  States 
from  1878  to  1893.  Every  nation  does  this  to  some 
extent  by  the  use  of  subsidiary  silver.  The  attempt 
to  carry  out  the  policy  on  a  larger  scale,  as  a  means  of 
keeping  the  volume  of  the  world's  currency  large,  subjects 
the  nations  that  undertake  it  to  dangers  like  those  suffered 
by  the  United  States  under  the  Sherman  Act.  A  com- 
mercial crisis  may  make  an  amount  of  silver  coin  which 
it  is  easy  for  a  nation  to  carry  during  one  year  exceed- 

'  Besides  the  references  at  the  beginning  of  the  chapter,  see  F.  W.  Taus- 
sig's excellent  little  book  on  "  The  Silver  Situation  in  the  United  States," 
New  York,  1893. 


^  YMME  TALLISM.  2  2  5 

ingly  diflficult  to  carry  during  the  next.  This  liabilityls 
mtensified  by  the  creation  of  a  number  of  contracts  in 
which  the  commercial  world  nullifies  the  action  of  the 
government  and  uses  the  metal  it  wants,  independently 
of  legal  tender  clauses. 

3.  Symmetallisni,  under  which  the  unit  of  currency 
would  consist  not  of  a  certain  weight  of  either  metal,  but 
of  a  certain  weight  of  both  metals  combined.  Instead  of 
saying  that  a  dollar  should  consist  of  23.2  grains  of  gold 
or  371.25  grains  of  silver,  we  might  say  that  it  should 
consist  of  1 1.6  grains  of  gold  and  185.625  grains  of  silver. 
Of  course  the  ratio  of  weight  and  valuation  of  the  two 
metals  might  be  wholly  different  from  what  it  is  in  this 
illustration  without  altering  the  principle. 

The  advocates  of  this  system,  which  has  been  indepen- 
dently suggested  from  several  quarters,  urge  that  it  offers 
all  the  advantages  of  bimetallism  while  reducing  its  dan- 
gers to  a  minimum.  The  reply  of  the  gold  monometallist 
is  that  these  advantages  of  bimetallism  are  not  so  great  as 
to  warrant  us  in  exposing  ourselves  to  even  a  fraction  of  its 
dangers  ;  that  the  artificial  character  of  the  system  opens 
the  door  for  abuse  of  government  powers  ;  and  that  unless 
it  were  adopted  by  concurrent  action  of  all  the  commercial 
nations  of  the  world,  it  would  give  rise  to  fluctuations  in 
exchange  and  complications  in  the  fulfilment  of  inter- 
national contracts  which  would  more  than  neutraHze  any 
benefits  which  we  might  expect  from  it. 

4.  Free  coinage  of  silver  at  the  old  ratio  of  16  to  i,  or 
even  I5i-  to  i,  regardless  of  what  becomes  of  gold. 

This  is  the  policy  urged  by  those  who  see  the  evils  of  con- 
tracted currency  so  clearly  that  they  have  no  vision  left  for 
the  much  worse  evils  which  would  follow  the  adoption  of 
some  other  plans.  They  attempt  to  correct  a  compara- 
tively slight  ill  by  an  indefinitely  worse  one. 

§  248.  If  free  silver  coinage  were  adopted  we  should  find 
ourselves  using  a  currency  different  from  that  of  the  other 

IS 


226  MONE  Y. 

nations  with  which  we  deal.  The  currency  of  the  United 
States  would  be  exposed  to  the  full  stress  of  any  future 
changes  in  the  conditions  of  silver  production.  If  its  sup- 
plies were  stopped,  we  alone  should  have  to  bear  the  con- 
traction ;  if  its  supplies  were  increased  the  whole  inflation 
would  come  upon  our  markets.'  As  matters  stand  at 
present,  an  increase  of  a  supply  of  gold  in  one  country 
causes  a  momentarily  higher  price  level  in  that  country, 
but  this  high  price  level  makes  it  a  good  market  to  sell 
in  and  a  bad  market  to  buy  in.  People  bring  goods  from 
abroad  and  take  away  gold.  Price3  adjust  themselves 
nearly  to  their  normal  level.  If  the  world's  increase  in 
gold  coin  has  been  so  large  that  the  whole  effect  cannot 
be  neutralized  in  this  way,  the  change,  such  as  it  is,  is 
shared  by  the  different  trading  countries  alike,  and  does 
not  affect  their  commercial  relations  one  with  another, 
either  in  the  matter  of  imports  and  exports  or  in  the  more 
important  matter  of  interest  payments.  But  if  we  used 
a  different  currency  from  that  which  was  accepted  by  the 
nations  of  Europe,  we  could  not  dispose  of  a  surplus  ex- 
cept with  great  delay  and  inconvenience  and  after  fluc- 
tuations in  prices  almost  if  not  quite  as  great  as  those 
to  which  we  were  liable  in  our  time  of  irredeemable 
paper  money. 

§  249.  Moreover,  such  a  currency  would  not  be  univer- 
sally acceptable  even  in  our  own  country  ;  and  the  con- 
traction of  credit  which  would  result  from  its  use  would 
outweigh  any  apparent  gain  from  increase  in  the  cur- 
rency. No  man  can  be  compelled  to  lend  against  his  will ; 
and  if  he  is  liable  to  be  paid  in  unacceptable  coin,  he  will 
either  refuse  to  lend  or  charge  a  high  rate  of  interest. 
Those  who  lay  most  stress  on  the  injustice  of  the  de- 
monetization of  silver  overlook  the  fact  that  the  saving  on 
interest  payments  to  the  borrowers  of  this  country  since 

'  We  should  have  nominal  help  from  a  few  silver-using  countries,  but  their 
demand  for  additional  currency  is  so  small  as  to  be  scarcely  worth  counting. 


CHANGE   OF  STANDARDS.  22/ 

1873  has  done  much  to  counterbalance  their  loss  on  the 
appreciation  of  the  principal.  The  borrowers  have  taken 
with  one  hand  and  given  with  the  other ;  the  low  bor- 
rowing rate  has  been  dependent  on  the  acceptability  of 
the  terms  of  the  loan. 

§  250.  In  the  third  place,  the  change  would  create  a 
sudden  alteration  of  the  relative  positions  of  debtor  and 
creditor  which  would  involve  a  disastrous  violation  of 
equity  and  give  the  future  credit  of  the  country  a  blow 
from  which  it  would  require  years  to  recover.  Its  adop- 
tion would  at  once  scale  down  all  debts  to  much  less  than 
their  present  value.  Our  experience  under  the  Sherman 
Act  shows  that  free  coinage  on  the  part  of  the  United 
States,  or  any  single  nation,  could  hardly  be  expected  to 
raise  the  cost  of  a  silver  dollar  to  a  point  much  higher 
than  two-thirds  of  the  cost  of  the  present  gold  dollar. 
The  resulting  depreciation  of  the  dollar  would  from  its 
suddenness  be  infinitely  worse  than  any  gradual  appre- 
ciation which  has  taken  place  during  the  last  twenty 
years. 

It  is  not  a  question  whether  it  would  have  been  more 
equitable  to  have  had  continuous  free  coinage  of  silver 
and  let  people  adjust  their  contracts  and  interest  rates 
accordingly,  but  whether  we  can  properly  scale  down  to 
a  silver  basis  contracts  which  were  made  under  the  ex- 
pectation that  the  country  would  be  on  a  gold  basis. 
Such  a  change  once  made  would  create  a  liability  of 
similar  changes  in  the  future,  and  would  make  the  nego- 
tiation of  loans  or  of  long-time  contracts  enormously 
difficult.  Any  apparent  gain  to  the  debtors  would  be 
much  more  than  offset  by  the  difficulty  of  borrowing 
capital  in  the  future ;  a  difficulty  which  could  be  avoided 
only  by  abandoning  the  use  of  a  discredited  currency  and 
employing  some  other  standard  than  the  legal  tender 
fixed  by  statute. 

§  251.  Even  greater  dangers  than  those  connected  with 


228  MONEY. 

the  free  coinage  of  silver  are  involved  in  the  proposal  that 
the  government  should  undertake  to  furnish  the  people 
the  quantity  of  money  that  may  be  needed  by  the  issue 
of  paper  which  is  a  legal  tender.  Some  of  the  plans  for 
this  purpose  arrange  for  the  assumption  of  banking  func- 
tions by  the  government ;  these  are  discussed  in  the  next 
chapter.  Others  contemplate  the  direct  issue  of  legal 
tender  notes  without  the  pretense  of  a  banking  reserve. 
Under  each  and  every  plan  the  existence  of  a  currency 
whose  volume  and  purchasing  power  are  regulated  by 
the  discretion  of  the  government  exposes  the  people  to 
the  most  serious  dangers. 

Three  motives  combine  to  cause  unwise  and  spasmodic 
inflation  of  paper  money  of  this  kind  : 

1.  A  fiscal  motive  which  leads  governments  to  issue 
such  money  as  a  means  of  paying  expenses  without  taxa- 
tion. 

2.  A  constant  pressure  from  the  debtor  classes,  which 
form  a  large  and  frequently  a  most  influential  element  in 
the  body  politic,  for  an  increased  volume  of  legal  tender 
money. 

3.  A  general  popularity  of  such  issues  among  those  who 
look  only  at  surface  effects,  and  who  observe  a  certain 
temporary  prosperity  to  which  they  give  rise,  without 
foreseeing  the  inevitable  reaction,  or  tracing  it  back  to 
its  proper  cause  when  it  finally  comes. 

§  252.  Whatever  momentary  ease  may  be  derived  from 
inflation  proves  to  be  dearly  purchased.  If  a  government 
resorts  to  this  method  as  a  ready  means  of  settling  cur- 
rent accounts,  all  persons  who  have  dealings  with  the 
government  will  make  charges  for  future  supplies  at 
prices  high  enough  to  cover  the  risk ;  or  they  may  go  so 
far  as  to  insist  on  payment  in  coin,  which  can  only  be 
obtained  by  borrowing  at  a  rate  of  interest  much  higher 
than  would  have  prevailed  in  the  absence  of  inflation. 
The  history  of  the  United  States  in  the  Civil  War  shows 


INFLATION  AND  LOANS.  229 

how  great  was  the  real  increase  of  debt  due  to  the  use  of 
paper  money.  Such  instances  might  be  indefinitely  mul- 
tiplied. Events  take  the  same  course  in  the  transactions 
of  private  debtors.  To  many  of  these  debtors  inflation 
may  give  momentary  ease.  If  a  man  has  commodities  to 
sell  and  debts  to  pay,  anything  which  increases  the  price 
of  his  goods  makes  it  possible  for  him  to  pay  a  larger 
amount  of  debts  with  a  given  amount  of  products.  But 
if  he  has  no  such  products  to  sell,  he  is  neither  better  nor 
worse  off  than  he  was  before  ;  and  if  he  wishes  to  con- 
tract new  debts  he  suffers  exceedingly  from  the  change. 

§  253.  The  reason  for  this  is  not  always  apparent  to  a 
superficial  observer.  He  thinks  that  he  wants  to  borrow 
money,  and  that  therefore  if  there  is  more  money  he  will 
find  it  easier  to  get.  In  point  of  fact,  he  does  not  want 
to  borrow  money,  but  capital.'  If  he  has  land  to  improve, 
he  wishes  to  invest  a  certain  amount  of  capital  in  its  de- 
velopment. If  he  has  a  factory  to  build,  he  wishes  to  buy 
bricks  and  mortar  and  machinery  and  put  them  into  use. 
If  the  currency  is  inflated  and  the  number  of  dollars  in- 
creased, he  will  have  to  borrow  more  dollars  in  order  to 
obtain  the  same  amount  of  capital.  If  the  currency  of  the 
country  has  increased  fifty  per  cent,  and  the  general  level 
of  prices  has  correspondingly  risen,  making  it  easier  for 
the  old  debtors  to  pay  their  debts,  the  borrower  who 
needs  $1000  on  the  old  basis  will  now  have  to  borrow 
$1500.  The  demand  for  money  will  thus  keep  pace  with 
the  artificial  increase  of  the  supply.  Meantime,  the  risk 
attendant  upon  lending  money  will  have  become  very 
great,  since  a  government  which  has  once  begun  to  in- 
flate the  currency  will  be  liable  to  do  it  again.  Some 
men  will  be  unwilling  to  lend  money  at  all  and  will  insist 
on  using  it  themselves ;    others  will  demand  additional 

*  There  is  an  exception  in  a  panic  or  other  similar  emergency  where  people 
are  seeking  means  of  payment  rather  than  means  of  investment.  In  such 
cases,  issues  of  money  may,  for  the  moment,  prevent  interest  from  rising. 


2^0  MONEY. 

rates  of  interest  as  a  means  of  insurance  against  possible 
loss  from  further  depreciation  of  the  currency.  The  tim- 
idity of  those  capitalists  who  are  afraid  to  invest  at  all 
will  enable  those  who  actually  do  invest  to  demand  and 
receive  these  high  rates  of  interest.  Instead  of  lightening 
the  future  burdens  of  the  debtor  classes,  it  will  tend  to 
increase  them  ;  for  capitalists,  if  they  lend  at  all  in  a 
country  with  "  political  money,"  will  almost  certainly 
over-insure  themselves  by  demanding  exorbitant  interest 
rates.  No  usury  law  can  stop  this  process  without  still 
further  lessening  the  amount  of  capital  available  for 
borrowers,  thereby  hindering  the  development  of  the 
country  in  question. 

§  254.  Meantime,  any  general  stimulus  to  business, 
which  shows  itself  as  an  immediate  result  of  inflation,  is 
rapidly  exhausted.  During  the  period  when  prices  are 
rising,  there  is  often  great  business  activity,  and  products 
change  hands  rapidly.  Everybody  can  make  so  much 
money  by  his  sales  that  he  does  not  enquire  too  closely 
into  the  purchasing  power  of  the  money  thus  received. 
Consequently  the  products  on  hand  are  quickly  disposed 
of,  and  labor  is  actively  employed  to  make  new  ones.  The 
public  enjoyment  is  large  in  proportion  to  the  public 
capital  because  people  spend  freely  and  content  them- 
selves with  a  small  real  profit  under  the  guise  of  a  large 
apparent  one.  But  when  prices  have  ceased  to  rise,  the 
illusory  character  of  these  profits  makes  itself  felt.  Peo- 
ple find  that  their  investments  are  not  worth  what  was 
supposed.  A  reaction  sets  in  which  diminishes  the  utili- 
zation of  the  national  capital  even  more  conspicuously 
than  the  inflation  increased  it.  An  attempt  may  be 
made  to  stave  off  this  reaction  by  further  issues  of  cur- 
rency ;  but  there  soon  comes  a  time  when  these  issues 
are  discredited  and  when  the  reaction  becomes  more 
severe  from  the  efforts  which  have  been  made  to  post- 
pone it.     The  stimulus  of  inflation  is  like  that  of  alcohol 


INFLATION  AND    WAGES.  23 1 

or  opium ;  the  ensuing  depression  can  be  temporarily 
averted  by  increasing  the  dose,  but  at  the  expense  of 
making  the  final  collapse  more  ruinous. 

§  255.  Under  these  circumstances,  the  proportion  of 
legitimate  transactions  is  diminished,  and  the  amount  of 
speculative  or  gambling  transactions  largely  increased. 
Business  becomes  less  of  a  certainty  and  more  of  a  game. 
The  whole  country  becomes  poorer  under  conditions 
which  prevent  conservative  borrowing,  and  safe  invest- 
ment. Perhaps  the  greatest  sufferers  of  all  are  the  work- 
ing classes.  They  accept  gladly  an  increase  in  money 
wages,  not  noticing  that  the  purchasing  power  of  that 
money  has  decreased  faster  than  its  nominal  amount  has 
increased.  An  examination  of  statistics  during  the  Civil 
War  shows  that  under  inconvertible  paper  currency, 
though  the  nominal  wages  of  the  workmen  increased  con- 
siderably, the  amount  they  could  purchase  with  a  day's 
wages  was  decidedly  reduced.  And  if  the  speculative  ac- 
tivity under  these  circumstances  sometimes  causes  the 
working  force  of  the  community  to  be  more  fully  em- 
ployed than  it  was  before,  it  is  followed  by  a  reaction 
and  a  period  of  unemployment  whose  burdens  more  than 
counterbalance  the  transient  gain. 

Of  all  the  scientific  students  of  currency  questions, 
there  is  no  one  v.ho  emphasizes  the  needs  of  the  debtor 
classes  as  vigorously  as  General  Walker ;  and  Walker 
does  not  hesitate  to  say  that  the  man  who,  having  refer- 
ence exclusively  to  economic  interests,  advocates  the  scal- 
ing down  of  debts  for  the  sake  of  encouraging  trade  and 
production,  shows  himself  so  ignorant  of  history  as  to  be 
a  wholly  unfit  adviser  as  to  the  present  and  the  future. 


CHAPTER  VIII. 

CREDIT. 

Checks  and  Clearings — Domestic  and  Foreign  Exchange — Influence  of 
Deposit  Accounts  on  Prices — Note  Issue  and  its  Dangers — Attempts  to 
Regulate  Note  Issue — The  Government  as  a  Banker. 

C.  F.  Dunbar:  "Chapters  on  the  History  and  Theory  of  Banking." 
New  York,  1892. 

W.  Bagehot :  "Lombard  Street,  a  Description  of  the  Money  Market." 
7th  ed.,  London,  1878. 

G.  J.  Goschen  :  "The  Theory  of  the  Foreign  Exchanges."  14th  ed., 
London,  iSgo. 

Those  who  wish  to  study  the  subject  more  thoroughly  should  acquaint 
themselves  with  the  writings  of  Ricardo  and  with  those  of  II.  D.  Macleod. 
Still  more  detailed  are  the  six  volumes  of  Tooke  and  Newmarch  :  "  A  His- 
tory of  Prices  and  of  the  State  of  the  Circulation,  1792-1856."  London, 
1838-57. 

§  256.  The  money  which  an  individual  uses  in  his 
business,  though  a  necessary  part  of  his  capital,  often 
seems  like  an  unproductive  one.  If  he  can  employ  credit 
instead  of  cash  as  a  means  of  making  his  payments,  he 
has  a  correspondingly  larger  amount  to  spend  in  machin- 
ery and  other  permanent  investments  whose  direct  pro- 
ductive power  is  more  obvious  than  that  of  money.  What 
is  true  of  an  individual  is  at  least  equally  true  of  a  com- 
munity. If  capital  is  scarce,  the  community  makes  every 
effort  to  use  credit  instead  of  money,  so  as  to  avoid  the 
necessity  of  employing  any  part  of  its  capital  for  conduct- 
ing exchanges.  If  the  property  of  a  certain  town  amounts 
to  $icx),000  and  $20,<X)0  of  this  must  be  used  as  a  cash  re- 

23s 


REDUCTION  OF  CASH  RESERVES.  233 

serve  in  order  to  transact  the  business  of  the  place  securely, 
the  inhabitants  often  try  to  avoid  the  use  of  the  $20,0(X) 
in  every  way  possible,  so  as  to  have  the  whole  $i(X),ooo 
to  spend  for  things  directly  serviceable  in  production  and 
consumption,  instead  of  $80,000  only.  In  other  words, 
they  try  to  get  along  with  just  as  little  actual  money  as 
possible. 

§  257.  It  is  sometimes  thought  that  this  is  a  sign  of 
advancing  civilization.  We  are  told  that  people  first  pass 
through  a  regime  of  barter,  where  goods  are  exchanged 
for  goods ;  then  follows  the  use  of  money  as  a  means  of 
transfer ;  and  this  in  turn,  in  the  highest  stages  of  indus- 
trial evolution,  gives  place  to  credit.  This  last  statement 
is  hardly  warranted  by  the  facts.  The  tendency  of  recent 
times  seems  to  be  pretty  clearly  in  the  direction  of  an  in- 
creased use  of  cash  in  mercantile  transactions.  It  is  in 
semi-civilized  countries  like  Turkey  that  we  see  the  fullest 
operation  of  the  credit  system.  It  is  doubtless  true  that 
highly  organized  communities  do  some  things  on  credit 
which  less  advanced  communities  cannot  do  at  all.  But 
when  such  operations  have  once  become  established,  the 
tendency  is  toward  an  increasing  use  of  cash  in  their  con- 
summation ;  a  practice  which  saves  time,  saves  waste,  and 
saves  middlemen's  profits.  Experience  shows  that  the 
apparent  advantages  from  the  use  of  credit  are  often  out- 
weighed by  less  obvious  but  more  real  advantages  from 
not  using  it. 

§  258.  The  pressure  to  use  little  money  and  much 
credit  makes  itself  felt  in  two  distinct  cases  : 

I.  In  very  poor  communities,  where  the  obvious  needs 
for  consumption  are  great,  money  in  the  cash  drawer 
seems  an  unnecessary  luxury.  People  are  apt  to  spend 
all  they  have,  and  trust  to  getting  more  when  more  is 
needed.  In  this  way  they  overreach  themselves.  They 
leave  too  little  for  effective  use  as  a  medium  of  exchange 
By    spending    every   cent    they   possess,    they   hamper 


234  CREDIT. 

production  and  exchange  by  constantly  keeping  their 
cash  reserves  at  too  low  a  figure ;  somewhat  as  the 
improvident  operative,  who  spends  every  dollar  before 
he  has  earned  it,  keeps  himself  constantly  in  the  power 
of  credit  stores  which  charge  him  an  unfairly  high  rate  for 
his  accommodation.  In  a  community  of  this  kind  we 
find  an  inadequate  supply  of  money,  a  very  low  level  of 
prices  for  cash,  a  much  higher  level  of  credit  prjces,  and  a 
commercial  system  so  uncertain  and  cumbersome  as  to 
prevent  people  from  serving  one  another  most  effec- 
tively and  from  selling  their  products  in  outside  markets 
at  the  best  advantage. 

2.  Another  cause  of  scant  money  supply  is  exemplified 
in  communities  of  active  producers.  Such  people  spend 
their  money,  not  for  immediate  personal  consumption, 
but  for  various  forms  of  capital  which  will  tend  to  in- 
crease their  wealth  in  the  future.  It  is  not  because 
they  are  poor  that  they  keep  themselves  scantily  supplied 
with  money,  but  because  they  hope  to  be  rich  by  means 
of  its  investment.  Where  farms,  railroads,  factories,  and 
other  forms  of  productive  enterprise  seem  to  insure  their 
owners  a  return  of  ten  per  cent,  the  temptation  to  use 
too  much  money  in  purchasing  means  of  production  and 
leave  too  little  to  serve  as  a  medium  of  exchange  is  at 
times  quite  overwhelming.  In  such  communities  there 
is  always  an  active  attempt  to  develop  a  credit  system 
which  shall  serve  the  place  of  money. 

§  259.  The  simplest  means  of  accomplishing  this  result 
is  the  use  of  account  books  and  offsets.  If  A  purchases 
stoves  of  B,  and  B  purchases  coal  of  A,  each  transaction 
creates  a  debt.  If  A's,  purchases  in  the  course  of  a  year 
amount  to  $100  and  ^'s  purchases  to  $90,  the  debt  can  be 
settled  by  the  payment  of  $10,  and  the  use  of  money 
thus  greatly  lessened.  But  such  a  process  is  only  avail- 
able where  two  people  are  dealing  with  one  another.  If 
A  sells  to  By  B  to  C,  and  C  to  A,  a  comparison  of  the 


BANK  CHECKS.  235 

books  and  a  system  of  offsets  connected  with  it  would  in- 
volve so  much  time  and  uncertainty  that  it  would  proba- 
bly be  easier  to  pay  in  cash. 

§  260.  The  system  of  bank  credits  has  been  utilized 
to  meet  this  difficulty.  Suppose  that  A,  B,  and  C  all  have 
deposits  in  the  same  bank.  A  owes  B  $100,  B  owes  C 
$90,  6' owes  y^  $80.  Instead  of  paying  one  another  the 
money,  each  gives  his  creditor  an  order  or  draft  on  the 
bank  for  the  amount  of  the  debt.  Such  an  order  is  known 
as  a  check.  When  B  receives  ^'s  check  he  takes  it  to  the 
bank  ;  and  instead  of  collecting  the  money  he  has  the 
sum  credited  to  his  account.  Against  this  credit  of  $100 
we  have  to  offset  a  debit  of  $90,  which  B  has  drawn  from 
his  account  to  pay  C,  leaving  him  $10  better  off  than  he 
was  before.  C  in  like  manner  has  a  credit  of  $90  and  a 
debit  of  $80  ;  while  A  has  a  credit  of  $80  against  a  debit 
of  $100,  representing  a  net  reduction  of  $20  in  the  value 
of  his  deposits.  All  of  these  transactions  can  be  settled 
or  "  cleared  "  if  the  bank  collects  $20  from  A  and  pays 
$10  each  to  B  and  C.  Transactions  to  the  amount  of 
$270  would  thus  be  effected  by  the  use  of  $20  actual  cash. 
In  many  instances,  even  this  small  amount  can  be  reduced. 
B  and  C  will  leave  their  money  on  deposit  instead  of 
calling  for  the  cash  from  the  bank ;  while  A  will  make 
good  his  deficit,  not  by  an  actual  deposit  of  cash,  but  by 
an  excess  of  credits  over  drafts  in  the  immediate  future. 
A  balance  against  him  to-day  will  be  offset  by  a  similar 
balance  in  his  favor  to-morrow.  The  necessity  for  actual 
payments  of  cash  to  or  from  the  bank  will  be  diminished, 
if  the  accounts  of  different  depositors  are  left  to  run  from 
month  to  month. 

§261.  li  A,  B,  and  C  deal  with  different  banks,  the  same 
process  of  settling  debts  without  the  use  of  money  is 
effected  through  the  agency  of  a  clearing  house.  If  A 
has  a  deposit  in  the  First  National  Bank,  while  B  has  a 
deposit  in  the  Second  National  Bank  of  the  same  place, 


236  CREDIT. 

A  pays  B  by  giving  him  an  order  on  the  First  National 
Bank,  but  B  does  not  take  it  to  that  bank  for  collection  ;  he 
takes  it  to  his  own  bank,  and  transfers  to  that  bank  by 
endorsement  his  title  to  the  check,  the  bank  meantime 
crediting  him  with  a  corresponding  sum  on  his  deposit 
account.  This  check,  which  was  formerly  an  order  from 
A  to  the  First  National  Bank  to  pay  $100  to  B,  is  by  this 
endorsement  made  an  order  to  the  First  National  Bank  to 
pay  $100  to  the  Second  National  Bank.  In  the  course 
of  the  day  each  bank  thus  accumulates  a  large  number  of 
orders  in  its  favor  against  other  banks  in  the  same  place. 
These  orders  or  credits  are  all  sent  to  a  clearing  house, 
which  does  for  the  different  banks  the  same  work  that 
the  bank  did  for  its  individual  customers  in  the  case  pre- 
viously supposed.  Any  bank  that  has  an  excess  of 
orders  in  its  favor  over  the  orders  presented  against  it 
is  credited  with  the  surplus  ;  while  any  bank  that  has  a 
balance  in  the  other  direction  is  debited  with  the  defi- 
ciency. By  paying  these  small  differences  to  the  clear- 
ing house  the  banks  can  settle  their  obligations  to  one 
another  with  very  little  use  of  actual  cash.  If  the 
accounts,  instead  of  being  settled  every  day,  are  allowed 
to  go  on  for  a  week  or  month,  the  proportion  of  cash 
payments  to  checks  cleared  becomes  exceedingly  small. 

§  262.  For  the  successful  operation  of  this  system  it  is 
not  necessary  that  the  different  banks  should  all  be  situ- 
ated in  the  same  place.  Every  large  city  acts  as  a  clear- 
ing centre  for  the  country  banks  in  the  districts  around  it. 
New  York,  in  like  manner,  acts  as  a  clearing  centre  for  the 
whole  of  the  United  States,  and  London  for  the  whole  of 
England.  \iX\x\  Albany  wishes  to  pay  a  debt  of  $ICX) 
to  Fin  St.  Paul,  he  sends  a  check  on  his  own  bank  in 
Albany.  This  check  is  an  order  to  the  Albany  Bank  to 
pay  $100  to  Y.  F  takes  it  to  his  bank  in  St.  Paul,  en- 
dorses it  payable  to  the  order  of  that  bank,  and  receives 
the  corresponding  sum  to  the  credit  of  his  deposit  account. 


THE   CLEARING-HOUSE  SYSTEM.  237 

The  St.  Paul  bank  sends  it  for  collection  to  a  bank  in 
New  York  with  which  it  maintains  a  deposit,  endorsing  it 
to  the  order  of  the  New  York  bank,  and  is  credited  with 
a  corresponding  sum  on  its  deposit  account  in  New  York 
City.  The  New  York  bank  sends  it  to  the  clearing  house 
for  collection  from  some  other  New  York  bank  which  acts 
as  agent  for  the  Albany  bank  on  which  the  check  is 
drawn,  and  with  which  the  Albany  bank  is  presumed  to 
have  a  deposit  account.  In  the  New  York  clearing  house 
it  now  appears  in  the  form  of  an  obligation  from  one  New 
York  bank  to  another.  It  is  credited  by  the  New  York 
clearing  house  to  the  agent  or  depositary  of  the  St.  Paul 
bank,  and  debited  to  the  agent  or  depositary  of  the  Al- 
bany bank.  The  New  York  bank  which  is  thus  debited 
with  the  check  deducts  it  from  the  deposit  account  of 
the  bank  in  Albany ;  which,  in  its  turn,  on  receipt  of  the 
check,  deducts  it  from  the  account  of  its  customer  who 
originally  signed  it.  In  the  New  York  clearing  house, 
meantime,  this  check  has  gone  in  with  a  mass  of  other 
checks  drawn  in  all  parts  of  the  country,  and  sent  to 
all  parts  of  the  country,  which  in  time  reach  New  York 
in  the  form  of  claims  of  one  New  York  bank  on  another. 
These  claims  are  thus  settled  by  the  payment,  to  or  from 
the  New  York  clearing  house,  of  insignificantly  small  sums 
of  money  representing  the  difference  between  the  credits 
and  debits  of  individual  banks. 

§  263.  It  is  assumed  in  describing  this  transaction  that 
the  right  to  receive  a  given  sum  of  money  commands  the 
same  price,  whether  the  payment  be  made  in  St.  Paul,  in 
New  York,  or  in  Albany.  This  assumption  is  not  always 
fulfilled.  If  a  great  many  people  want  money  in  the 
West,  while  comparatively  few  want  it  in  the  East,  there 
will  be  an  excess  of  checks  calling  for  payments  in  one 
direction,  and  a  deficiency  in  the  other.  Some  money 
will  have  to  be  shipped  westward  ;  and  rights  to  receive 
money  in  St.  Paul  will  be  worth  more  than  rights  to  cor- 


238  CREDIT. 

responding  sums  in  New  York  or  Albany,  by  a  difference 
which  may  equal  the  cost  of  such  shipment.  These 
differences  show  themselves  in  the  quotations  for  "  do- 
mestic exchange."  The  bank  which  makes  a  payment  in 
St.  Paul,  where  money  is  scarce,  and  receives  a  claim  on 
New  York,  where  money  is  plenty,  must  either  deduct 
this  difference  or  pocket  the  loss.  If  it  is  dealing  with  a 
regular  depositor  it  will  probably  do  the  latter.  A  loss 
at  one  season  is  likely  to  be  made  up  by  a  corresponding 
gain  at  another ;  and  in  any  event  the  amount  of  such 
loss  in  domestic  exchange  is  small  as  compared  with  the 
profit  which  the  bank  can  make  from  a  steady  deposit 
account. 

§  264.  In  foreign  exchange  the  case  is  different.  The 
cost  of  shipment  is  greater,  giving  a  wider  margin  of  profit 
and  loss ;  and  the  remittances  are  managed  by  houses 
which  make  them  a  direct  source  of  income,  instead  of 
doing  the  work  for  nothing  as  a  means  of  attracting 
deposit  accounts. 

The  bullion  value  of  a  pound  sterling  is  $4.86|;  but 
the  right  to  receive  a  pound  sterling  in  London  cannot 
always  be  bought  or  sold  for  that  sum  in  New  York. 
This  will  happen  only  when  the  payments  which  Ameri- 
cans wish  to  make  in  London  are  approximately  equal  in 
amount  to  those  which  Englishmen  wish  to  make  in  New 
York.  In  that  case  the  foreign  exchange  houses  which 
have  branches  in  both  cities  will  sell  drafts  in  each  place 
payable  by  their  branch  in  the  other ;  and  the  money 
received  from  the  sale  of  the  drafts  in  one  direction  will 
furnish  the  sums  needed  for  paying  those  in  the  other 
direction  as  fast  as  they  are  presented.  The  competition 
of  different  houses  with  one  another  will  prevent  them 
from  doing  much  more  than  this ;  the  profits  of  such 
remittances  are  made  on  a  very  narrow  margin. 

§  265.  If  there  are  more  payments  to  be  made  in 
London  than  in  New  York,  the  London  houses  will  find 


FOREIGN  EXCHANGE.  239 

that  they  are  called  on  for  much  money,  and  will  find  it 
hard  to  sell  drafts  on  New  York  with  which  to  obtain  the 
means  of  payment.  Their  cash  reserves  diminish  just 
when  they  need  them  most.  On  the  other  hand,  the 
New  York  houses  find  everybody  desirous  to  buy  drafts, 
which  may  prove  a  source  of  embarrassment  at  the  Lon- 
don end  of  the  transaction.  They  therefore  raise  the 
price  of  such  drafts  to  $4.89  or  thereabouts.  It  cannot 
go  much  higher  than  this,  because  two  cents  and  a  half 
covers  the  various  items  in  the  cost  of  shipping  the  gold — 
freight,  insurance,  etc., — and  a  man  desiring  to  pay  a  debt 
in  London  will  therefore  ship  the  specie  rather  than  pay 
a  rate  much  above  $4.89. 

If,  on  the  other  hand,  there  are  more  payments  to  be 
made  in  New  York  than  in  London,  the  New  York  houses 
are  anxious  to  sell  as  many  drafts  as  possible  ;  for  they  can 
thus  obtain  the  means  of  fulfilling  commercial  engage- 
ments which  their  London  houses  can  make  with  profit. 
To  save  the  necessity  of  actual  shipment  of  gold  from 
London  to  New  York,  the  New  York  houses  will  sell 
drafts  as  low  as  $4.83  ;  the  difference  between  this  and 
$4.86f  representing  the  expense  for  freight,  insurance,  and 
loss  of  interest  which  they  would  incur  by  shipping  the 
money.  Exchange  cannot  go  lower  than  this,  for  any 
further  reduction  would  make  it  cheaper  for  the  banking 
houses  to  meet  their  obligations  by  importing  specie. 

§  266.  The  limits  of  variation  in  foreign  exchange  are 
largely  affected  by  the  rate  of  discount  (interest  on  short- 
time  commercial  loans)  '  in  the  two  countries.  If  the  rate 
in  New  York  is  higher  than  in  London,  there  will  be  a 
tendency  to  keep  gold  in  New  York  for  the  sake  of  profit- 

*  If  the  interest  on  industrial  investments  (as  distinct  from  commercial 
loans)  is  enough  higher  in  New  York  than  in  London  to  overcome  the  disin- 
clination of  English  capital  to  emigrate,  we  shall  see  a  movement  of  goods 
from  England  to  America  which  is  paid  for  by  securities — commercial  bills  in 
one  direction  being  balanced  by  financial  transactions  which  offset  them. 


240  CREDIT. 

able  investment  in  short-time  or  demand  loans  instead  of 
shipping  it  to  London.  Such  a  difference  of  interest  rate 
will  retard  the  movement  of  gold  from  New  York  to 
London  when  exchange  is  high,  and  accelerate  the  move- 
ment from  London  to  New  York  when  exchange  is  low. 
When  a  movement  of  gold  from  London  seems  imminent, 
an  increase  of  the  Bank  of  England  rate  of  discount  is 
sometimes  made  for  the  purpose  of  checking  the  antici- 
pated outflow,  and  is  usually  successful  in  accomplishing 
its  end. 

§  267.  Besides  selling  drafts,  the  houses  engaged  in  the 
business  also  buy  exchange,  advancing  money  in  New 
York  on  bills  that  are  to  fall  due  in  London  sixty  days 
hence,  and  vice  versa,  at  a  discount  corresponding  to  the 
period  which  must  elapse  before  collection.  Besides  the 
profit  due  to  this  discount,  the  foreign  exchange  houses 
may  reap  an  advantage  from  foresight  in  predicting 
movements  in  exchange.  For  it  may  happen  that  the 
abundance  of  bills  on  London  in  New  York  to-day  which 
causes  them  to  be  sold  at  a  low  rate  will  be  followed  by 
a  reverse  condition  two  months  hence.  In  that  case  the 
collection  of  the  sixty-day  bill  in  London  will  give  the 
banking  house  the  money  at  just  the  right  time  and  place, 
and  put  its  resources  where  they  are  needed.  Such  anti- 
cipations of  future  wants,  when  correctly  made,  lessen  the 
necessity  for  gold  shipments  and  result  in  public  conven- 
ience as  well  as  in  private  profit.  For,  unless  a  country  is 
a  large  producer  of  gold,  an  outflow  of  the  metal  at  one 
season  is  very  apt  to  be  balanced  by  an  inflow  at  another. 
The  withdrawal  of  a  large  supply  of  money  would  tend  to 
make  prices  lower  than  they  were  the  year  before.  This 
would  make  the  country  a  good  market  to  buy  in  and  a 
bad  market  to  sell  in.  It  would  increase  the  exports  and 
diminish  the  imports  far  more  effectively  than  any  tariff 
ever  devised.  People  would  take  away  goods  and  leave 
gold  in  their  place  until  the  old  price  level  was  reached. 


ARBITRAGE.  12/^\ 

If  a  foreign  exchange  house  can  foresee  this  prospective 
return  of  the  metal  and  content  itself  with  sending  rights 
to  money  by  mail  instead  of  shipping  the  metal  itself,  it 
can  save  the  public  the  loss  involved  in  the  double  move- 
ment of  money  back  and  forth. 

§  268.  It  is  not  necessary  that  we  should  receive  the 
money  back  from  the  same  country  to  which  we  send  it. 
If  we  ship  gold  to  England  and  England  ships  it  to  Brazil, 
Brazil  may  ship  it  back  to  the  United  States.  And  simi- 
larly, if  we  remain  indebted  to  England  and  England  re- 
mains indebted  to  Brazil  on  the  current  exchange  account, 
the  whole  aiTair  will  settle  itself  without  movement  of 
money  if  Brazil  becomes  indebted  to  the  United  States. 
The  competition  of  arbitrage  brokers  (§  117)  with  one 
another  enables  the  most  roundabout  transactions  to  be 
adjusted  (usually  through  the  medium  of  London  as  a 
clearing  house)  at  a  very  small  margin  of  expense,  and 
with  comparatively  little  shipment  of  specie. 

§  269.  The  credit  system  as  thus  developed  affords  two 
quite  distinct  advantages  to  the  pubhc.  In  the  first  place 
it  furnishes  a  convenient  method  of  payment,  which 
avoids  the  risk  attendant  on  remittances  of  specie  or 
even  of  government  notes.  In  the  second  place  it  saves 
the  wear  and  tear  incident  to  the  use  of  metallic  money ; 
and  more  important  still,  it  saves  the  interest  on  the  capi- 
tal which  would  be  represented  by  a  large  mass  of  unnec- 
essary coin.  It  is  also  attended  with  profit  to  the  bankers, 
independent  of  the  commissions  which  they  may  charge 
on  exchange.  A  bank  knows  that  all  the  people  who 
have  the  right  to  draw  checks  upon  it  will  not  do  so 
in  a  single  day,  and  that  even  if  checks  are  drawn  by 
a  great  many  of  them,  others  will  make  deposits  which 
will  balance  the  losses.  If  every  bank  had  to  keep  a  reserve 
of  coin  equal  to  the  total  amount  of  checks  that  might 
be  drawn  upon  it,  the  check  and  clearing-house  system 

would  save  the  public  the  trouble   of  handling  money, 
16 


24J2  CREDIT. 

but  would  not  save  interest  on  idle  capital  or  give  any 
profit  to  the  bank.  But  no  bank  finds  it  necessary  to 
keep  a  reserve  of  one  hundred  per  cent  of  all  its  liabili- 
ties. Experience  proves  that  a  bank  which  keeps  a  cash 
reserve  equal  to  one-third,  or  even  to  one-fourth  of  its 
deposits,  is  prepared  for  all  contingencies  that  are  likely 
to  arise.' 

§  270.  The  proper  amount  of  this  reserve  will  vary 
according  to  the  circumstances  of  the  bank.  A  savings 
bank  (§  154)  can  work  with  a  very  small  amount  of  cash. 
It  does  not  encourage  its  depositors  to  draw  drafts  upon 
it  and  use  them  as  means  of  remittance.  In  fact,  most 
savings  banks  expressly  reserve  the  right  to  refuse  pay- 
ment of  such  drafts  for  a  considerable  length  of  time. 
The  savings  bank  is  essentially  a  means  of  investment 
rather  than  of  convenience  in  payment  or  economy  of 
currency.  It  attracts  funds  from  depositors  by  the  offer 
of  interest.  It  invests  a  large  proportion  of  those  funds 
in  long-time  loans,  chiefly  on  real  estate,  and  it  keeps  on 
hand  only  a  sufficient  amount  of  cash  or  easily  collectible 
assets  to  meet  a  few  drafts  from  those  persons  who  wish 
to  reduce  their  deposit  accounts.  But  a  commercial  bank 
of  the  modern  type  encourages  its  depositors  to  draw 
checks  upon  it,  and  gives  them  every  conceivable  facility 
for  using  such  checks  as  a  means  of  remittance  of  money. 
It  must  therefore  hold  a  larger  reserve  of  cash  to  meet 
such  drafts  ;  and  its  investments,  instead  of  being  of  a 
permanent  character  like  those  of  a  savings  bank,  are  put 
into  assets  that  will  mature  quickly,  so  that  in  case  of  any 
sudden  call  on  its  funds  in  excess  of  the  ordinary  cash 
reserve  it  can  at  once  secure  the  means  to  meet  all  de- 
mands.   There  is  no  standard  proportion  between  reserves 

'  The  theory  of  modem  banking  was  apparently  first  formulated  by 
Alexander  Hamilton.  It  is  most  fully  developed  in  the  works  of  H. 
D.  MacLeod,  especially  his  "Theory  and  Practice  of  Banking,"  London, 
1856. 


DEPOSITS  AND  DISCOUNTS.  243 

and  liabilities.  Everything  depends  on  the  situation  of 
the  bank  and  the  kind  of  business  that  it  is  doing.  City 
banks,  as  a  rule,  need  a  larger  reserve  than  country  banks. 
Account  is  taken  of  this  difference  in  the  United  States 
National  Banking  Law,  which  requires  the  banks  of  the 
larger  cities  to  keep  a  reserve  of  twenty-five  per  cent  on 
all  liabilities,  while  those  in  the  rest  of  the  country  are 
only  required  to  keep  one  of  fifteen  per  cent.  In  places 
where  a  large  reserve  is  kept,  the  banks  as  a  rule  do  not 
pay  interest  on  deposits.  They  cannot  afford  to  do  it. 
Besides,  the  very  existence  of  a  large  reserve  shows 
that  they  are  constantly  called  upon  to  furnish  facilities 
to  their  depositors  in  the  payment  of  debts  by  check. 
This  consideration  is  sufficient  to  attract  depositors  with- 
out the  offer  of  interest.  The  country  banks,  on  the  other 
hand,  and  the  loan  and  trust  companies — which  are  some- 
thing intermediate  between  true  banks  and  savings  banks  * 
— frequently  offer  a  small  rate  of  interest  on  deposits  of 
any  considerable  amount  and  duration. 

§  271.  In  any  good  banking  system,  most  of  the  de- 
posits used  as  a  means  of  payment  by  check  are  founded 
on  the  transactions  which  create  the  necessity  for  such 
payment ;  so  that  the  credit  given  is  made  proportionate 
to  the  occasion  for  its  use.  A  bank  invests  its  capital  to 
a  very  great  extent  in  commercial  paper.  If  a  retailer 
wishes  to  deal  in  stoves  and  has  not  at  the  moment  the 
money  with  which  to  buy  those  stoves  from  the  manu- 
facturer, he  can  pay  for  them  by  accepting  a  bill  due  at 
ninety  days  from  the  date  of  the  purchase.  The  manu- 
facturer takes  the  bill  to  the  bank,  where  he  endorses  it — 
that  is  to  say,  guarantees  that  he  will  make  it  good  to 

'  In  the  original  conception,  a  trust  company  should  not  receive  deposits 
subject  to  check,  but  should  chiefly  occupy  itself  with  handling  trust  funds, 
in  which  case  it  can  make  long-time  investments  like  those  of  a  savings 
bank  ;  but  most  of  the  large  American  companies  of  this  kind  hold  deposits 
subject  to  check,  discount  a  considerable  amount  of  commercial  paper,  and 
perform  all  the  important  functions  of  a  bank  except  that  of  note  issue. 


244  CREDIT, 

the  bank  if  the  dealer  does  not — and  then  has  it  dis- 
counted. '  In  this  transaction  the  bank  credits  him  with 
the  face  value  of  the  bill  less  ninety  days'  interest.  If 
the  discount  rate  is  six  per  cent  and  the  bill  is  accepted 
for  $i,ooo,  the  bank  deducts  three  months'  interest  at  six 
per  cent,  $15,  and  credits  the  manufacturer  with  $985. 
Theoretically,  the  manufacturer  can  have  this  money 
given  to  him  in  cash  at  once  ;  but  if  he  did  this  without 
some  exceptional  reason  the  bank  would  not  be  likely  to 
discount  bills  for  him  in  the  future.  He  leaves  it  on  de- 
posit, drawing  checks  against  his  account  as  he  has  need  of 
funds.  The  bank  is  reasonably  sure  that  the  total  amount 
of  checks  drawn  in  a  single  day  will  form  but  a  small 
fraction  of  its  whole  deposits.  It  therefore  keeps  but 
$2CXD  of  the  $985  as  reserve,  and  can  use  the  balance  as  a 
means  of  discounting  other  bills.  In  due  time  the  manu- 
facturer's account  is  exhausted ;  but  at  the  end  of  three 
months  when  the  bill  matures,  the  bank  will  receive 
$I,0(X).  This  gives  the  bank  a  profit  on  the  transaction 
which  compensates  it  for  the  trouble  and  risk  involved, 
and  for  the  loss  of  interest  on  the  comparatively  small 
reserve  which  it  has  been  compelled  to  maintain. 

§  272.  Accepted  bills  are  not  the  only  kind  of  security 
on  which  a  bank  makes  advances  ;  but  it  is  desirable  that 
the  bulk  of  the  paper  discounted  should  be  of  this  nature, 
if  not  of  this  form.  It  should  represent  a  need  of  money 
for  current  transactions  on  which  the  profit  is  to  be  real- 
ized in  a  comparatively  short  space  of  time.  Whenever 
there  is  a  pretense  of  this  without  the  reality  there  is  a 
decided  danger  to  the  bank.  When  parties  are  found  to 
be  drawing  what   is  known   as  accommodation  paper, — 

'  This  process  is  sometimes  accomplished  through  the  agency  of  a  bill 
broker,  who  borrows  a  large  part  of  his  capital  from  the  banks  and  buys 
bills  created  by  transactions  which  he  watches  more  closely  than  the  board 
of  bank  directors  finds  it  possible  to  do.  By  charging  his  customers  a 
slightly  higher  rate  of  discount  than  the  bank  charges  him,  he  can  make  a 
small  margin  of  profit  on  such  operations. 


AN  ELASTIC  CURRENCY.  245 

accepted  bills  on  the  basis  of  fictitious  transactions  instead 
of  actual  ones, — well  managed  banks  generally  refuse  to 
have  further  dealings  with  them. 

§  273.  The  public  service  rendered  by  the  banking  sys- 
tem bears  some  analogy  to  that  of  the  ordinary  commer- 
cial speculator.  The  speculator  sells  products  which  he 
does  not  now  have,  on  the  carefully  considered  expecta- 
tion of  obtaining  them  in  the  future.  He  thus  enables 
the  existing  stock  of  such  products  in  the  community 
to  be  more  effectively  utilized  (§  1 19).  In  like  manner 
the  banker  agrees  to  deliver  more  money  than  he  has  in 
hand,  with  the  expectation  of  obtaining  such  money  to 
advantage  when  he  needs  it.  He  thus  allows  the  stock 
of  money  in  the  community  to  be  more  fully  utilized,  and 
makes  it  unnecessary  to  carry  so  large  an  idle  reserve. 
The  bank  also  performs  a  work  of  insurance,  though  of 
somewhat  different  character  from  that  done  by  the  spe- 
culator. It  may  be  said  to  insure  credit.  If  it  discounts 
a  three  months'  note  and  allows  the  maker  to  draw  checks 
upon  the  sum  with  which  it  credits  him,  it  protects  the 
public,  which  accepts  such  checks,  from  the  risk  of  sub- 
sequent insolvency  on  the  part  of  the  maker.  It  is 
because  this  insurance  is  effective  that  the  public  will 
accept  checks  where  it  will  not  accept  promissory  notes. 

The  use  of  bank  deposits  as  means  of  current  payment 
gives  elasticity  to  the  currency.  To  see  what  this  means, 
let  us  consider  the  case  of  a  nation  doing  its  business 
without  bank  checks.  If  progress  in  the  arts,  or  immi- 
gration, or  an  unusually  good  harvest  creates  a  necessity 
for  an  increased  number  of  transactions,  a  scarcity  of  specie 
will  probably  ensue.  A  larger  volume  of  business  cannot 
readily  be  done  with  the  old  amount  of  money,  unless 
means  are  devised  to  make  it  circulate  more  rapidly.  In 
default  of  such  means  prices  will  fall  ;  and  although  this 
fall  in  prices  will  probably  work  its  own  cure  by  bringing 
in  specie   from  other  communities  (§  222),  the    process 


246  CREDIT. 

will  be  attended  with  some  hardship.  But  if  these  addi- 
tional transactions  furnish  a  basis  for  the  discount  of  bills 
and  increase  of  bank  deposits,  they  can  be  settled  by 
drawing  checks  with  comparatively  little  use  of  money. 
The  price  level  will  thus  remain  stable,  the  need  for 
additional  gold  will  be  reduced  to  a  minimum,  and  the 
industrial  growth  of  the  community  can  go  on  unhindered. 
§  274.  In  looking  at  the  advantages  of  this  method  of 
payment,  we  must  not  lose  sight  of  its  dangers.  The  dis- 
counts of  the  banks  may  not  merely  keep  pace  with  the 
growth  of  business,  but  exceed  it.  Credit  may  be  em- 
ployed, not  as  a  supplement  to  money,  but  as  a  substitute 
for  it.^     If  it  becomes  easy  to  obtain  the  accommodation 

'  The  view  here  advanced  is  intermediate  between  those  of  Walker  and 
of  Mill.  Walker  holds  that  checks  have  very  little  effect  on  the  general 
price  level ;  Mill  thinks  that  they  have  substantially  the  same  effect  as 
money  and  exactly  the  same  effect  as  bank  notes. 

Walker's  position  is  as  follows  :  The  general  level  of  prices  is  determined 
by  the  supply  and  demand  of  the  medium  of  exchange — either  coin  or  notes 
which  circulate  from  hand  to  hand.  On  the  price  level  thus  created,  there 
are  a  number  of  credit  payments  which  cancel  obligations  without  the  use 
of  money  ;  but  the  credit  instruments  used  for  this  purpose  originate  in  the 
transactions  to  be  settled,  and  disappear  when  the  business  which  occasions 
their  use  is  finished.  Therefore  checks  are  supplementary  instruments  of 
trade,  which  do  not  affect  the  money  supply  or  demand  and  can  have  no  in- 
fluence on  prices.     (Walker  counts  bank  notes  as  actual  money.) 

Walker  seems  to  overlook  the  fact  that  there  are  a  great  many  transac- 
tions for  which  money  or  checks  can  be  used  indiscriminately  ;  transactions 
which  people  will  settle  by  coin  if  they  cannot  use  bank  credit,  but  which 
will  be  paid  by  checks  when  public  confidence  is  good  and  bank  accommo- 
dation ample.  The  use  of  credit  for  this  purpose  has  the  effect  of  dimin- 
ishing the  demand  for  money. 

Mill  apparently  goes  too  far  in  the  other  direction.  Instead  of  treating 
checks  as  a  partial  substitute  for  money,  he  reasons  as  though  they  were  a 
«M?Wrja/ substitute.  Because  an  individual  can  use  cash  or  credit  indis- 
criminately, he  argues  that  a  nation  can  do  the  same.  This  inference  is 
not  fairly  warranted.  The  individual  can  convert  his  credit  into  cash,  with 
little  or  no  loss,  because  commercial  credit  is  backed  by  a  considerable  cash 
reserve  in  the  banks,  and  no  single  depositor  or  noteholder  has  large  enough 
credits  to  reduce  that  cash  reserve  very  seriously  by  his  personal  demands 
upon  it.     He  can  therefore  treat  cash  and  credit  as  equivalent.     But  if  too 


DANGERS  FROM  ELASTICITY.  247 

at  the  banks,  a  large  number  of  transactions  will  be  made 
on  credit.  The  checks  which  result  from  the  creation  of 
such  bank  credit  furnish  a  medium  of  exchange  almost  as 
efficient  as  money.  The  over-abundance  of  a  medium  of 
exchange  in  this  form  will  make  it  easier  to  get  money 
than  it  was  before.  This  will  tend  to  raise  prices.  Where 
this  process  is  once  begun  it  goes  on  by  its  own  momen- 
tum. When  stoves  are  worth  $10  apiece,  a  bill  for  one 
hundred  stoves  can  be  made  the  basis  of  a  bank  credit 
of  only  $1,000.  But  if  the  use  of  bank  credit  raises  the 
general  price  level,  stoves  may  soon  be  sold  for  $12  in- 
stead of  $10;  in  which  case  the  next  lot  of  stoves  will  be 
made  the  basis  for  a  credit  of  $1,200  instead  of  $1,000. 
This  concurrent  increase  of  credits  and  prices  may  con- 
tinue until  the  liabilities  of  the  banks  become  dispropor- 
tionate to  their  reserves.  When  the  public  perceives  this 
there  is  a  sudden  shock  to  confidence  and  a  withdrawal 
of  accommodation  which  causes  far  greater  distress  than 
would  have  resulted  had  the  facilities  of  payment  by  credit 
been  less  elastic  at  the  outset. 

§  275.  This  danger  is  very  much  greater  when  bank 
credit  takes  the  form  of  notes  instead  of  checks. 

We  have  thus  far  assumed  that  when  a  bank  discounts 
a  bill  it  gives  as  consideration  a  credit  or  deposit  account 
against  which  checks  can  be  drawn.  The  bank  may,  how- 
ever, with  equal  advantage  to  itself,  pay  out  over  its 
counter  a  corresponding  amount  of  notes.  Jn  these  notes 
the  bank  agrees  to  pay  to  the  bearer  on  demand  a  sum 
of  money  corresponding  to  the  face  value  of  the  note. 
From  the  standpoint  of  the  bank,  a  note  is  exactly  like  a 

many  individuals  try  to  do  this  at  the  same  time,  the  conversion  is  often  at- 
tended with  difficulty  and  loss.  The  domain  within  which  the  two  things 
can  be  used  interchangeably  is  after  all  a  rather  narrow  one  ;  and  an  en- 
largement of  this  domain  can  be  effected  only  by  a  rather  slow  change  of 
commercial  habits.  Therefore,  while  bark  credits  have  the  same  kind  of 
effect  on  prices  as  do  additional  issues  of  money,  it  will  hardly  do  to  assert 
that  they  have  the  same  effect. 


248  CREDIT, 

deposit  account.  $985  of  notes  imposes  on  the  bank  pre- 
cisely  the  same  obligation  as  $985  of  deposits  ;  namely, 
the  obligation  to  pay  that  amount  of  coin  whenever  the 
evidence  of  the  right  to  receive  it  is  presented.  But 
upon  the  public  the  note  may  have  a  very  different  effect 
from  the  deposit  account.  Credit  given  in  the  form  of  a 
deposit  account  is  exhausted  in  a  short  time,  because  the 
checks  drawn  against  it  soon  come  back  to  a  bank  for 
redemption.  But  credit  in  the  form  of  notes  may  remain 
outstanding  for  an  indefinite  period.  These  notes  may 
change  hands  a  thousand  times  before  returning  to  the 
bank.  Where  a  check  settles  a  single  transaction,  a  bank 
note  of  the  same  value  may  settle  a  very  large  number. 
There  are  also  practical  limitations  to  the  undue  expan- 
sion of  credit  in  the  form  of  deposits  which  are  by  no 
means  equally  effective  in  case  of  notes.  If  a  bank  is 
tempted  to  increase  its  deposit  accounts  more  than  the 
business  of  the  community  warrants,  and  tries  proportion- 
ately to  augment  its  coin  reserve,  this  process  soon  finds  a 
natural  limit  from  the  difficulty  of  getting  coin.  The  peo- 
ple themselves,  outside  of  the  banks,  need  to  use  a  certain 
amount  of  coin.  If  the  banks  try  to  encroach  on  this 
amount  for  their  own  purposes,  a  stringency  makes  itself 
felt.  But  if  the  banks  are  increasing  their  note  issues 
instead  of  their  deposit  accounts  the  people  will  use  these 
notes  as  a  reserve  in  their  pocket-books  and  let  the  banks 
withdraw  coin  from  actual  circulation  without  observation 
on  the  part  of  the  public.  All  of  these  things  make  bank 
notes  a  more  dangerous  medium  of  inflation  than  bank 
checks,  even  if  a  proper  reserve  is  maintained.  This 
danger  is  greatly  enhanced  by  the  probability,  almost 
amounting  to  a  certainty,  that  in  the  absence  of  special 
legislation  the  proper  reserve  will  not  be  maintained.  In 
a  new  country,  where  money  is  wanted,  the  issuing  of 
notes  is  regarded  as  a  patriotic  function,  which  promotes 
the  growth  of  the  region  and  renders  it  independent  of 


REACTION  FROM  OVERCONFIDENCE.  249 

the  money  lenders  of  older  communities.  The  presenta- 
tion of  bank  notes  for  redemption,  which  would  compel 
the  banks  to  keep  a  proper  reserve,  is  condemned  by  an 
unwise  public  sentiment  as  tending  to  injure  the  growth 
of  local  trade.  The  bank  officials  are  thus  actively  en- 
couraged to  do  business  with  an  inadequate  supply  of 
cash.  The  worst  abuses  of  the  bank  note  system  have 
been  made  with  the  connivance,  if  not  with  the  active 
participation,  of  the  communities  in  which  they  were 
carried  out. 

§  276.  If  prices  begin  to  increase,  from  any  cause  what- 
soever, this  increase  furnishes  a  ground  for  an  enlarged 
issue  of  notes  on  the  same  physical  volume  of  business. 
This  goes  on  until  prices  and  currency  both  become  so 
inflated  that  people  see  the  danger,  and  suddenly  refuse 
to  accept  the  notes  as  the  equivalent  of  money.  If  the 
note  issue  is  very  large  in  proportion  to  the  coin  avail- 
able, such  a  change  of  sentiment  may  come  at  almost 
any  moment.  A  bank  failure  is  sure  to  precipitate  it ;  a 
large  commercial  failure  not  infrequently  has  the  same 
result.  When  prices  have  risen  on  the  basis  of  an  arti- 
ficially increased  amount  of  the  medium  of  exchange,  a 
great  many  people  make  contracts  which  can  only  be  ful- 
filled, and  plans  which  can  only  be  successfully  carried 
out,  on  the  assumption  of  continued  public  confidence — 
not  to  say  over-confidence.  Under  such  circumstances, 
the  whole  industrial  community  lives  in  daily  peril  from 
every  kind  of  event  which  can  shake  this  confidence. 
Even  a  slight  shock  to  credit  may  result  in  a  severe  com= 
mercial  crisis,  with  a  long  list  of  failures,  and  a  long 
period  of  industrial  prostration. 

§  277.  Of  course,  bank  note  inflation  does  not  always 
lead  to  such  serious  disaster.  It  may  be  stopped  before 
the  crisis  is  reached.  If  it  is  purely  local  in  its  extent,  it 
is  almost  certain  to  work  its  own  cure.  If  the  banks  of  a 
single  locality  put  out  an  unusually  large  number  of  notes 


250  CREDIT. 

in  proportion  to  the  wants  of  trade,  coin  is  driven  to 
other  localities  so  rapidly  that  people  take  warning  at 
once.  Even  if  a  whole  country  is  flooded  with  increased 
bank  note  issues,  the  automatic  movement  of  money  to 
other  countries,  described  in  the  last  chapter,  may  give 
the  alarm  in  time  to  prevent  more  serious  evils.  But 
where  there  is  no  such  outlet,  and  where,  as  not  infre- 
quently happens,  the  whole  world  is  more  or  less  involved 
in  simultaneous  inflation,  there  is  no  marked  change  in 
the  movement  of  coin  from  one  country  to  another,  and 
no  warning  is  given  until  it  is  too  late  to  profit  by  it. 
We  find  that  the  great  commercial  crises  of  the  present 
century  have  been  preceded  by  periods  of  inflation  which 
have  simultaneously  involved  a  large  part  of  the  civilized 
world. 

§  278.  No  method  of  organization  of  the  banking  system 
has  been  devised  which  will  avoid  these  evils.  Local 
banks  and  centralized  banks  have  alike  been  subject  to 
them.  It  is  urged  by  the  advocates  of  local  banks  that 
they  will  know  what  are  the  needs  of  their  customers  ;  that 
they  will  issue  just  enough  currency  to  meet  these  needs; 
that  this  currency  will  only  circulate  in  a  region  for  which 
it  is  specially  destined ;  and  that  when  money  becomes 
redundant  in  that  region,  the  evil  will  work  its  own  cure. 
This  argument  depends  for  its  force  upon  the  assumption 
that  the  local  banks  of  different  regions  will  choose  dif- 
ferent times  for  increasing  their  issues.  As  a  matter  of 
fact,  there  is  every  probability  that  they  will  do  it  at  the 
same  time  in  a  large  number  of  regions.  Under  such 
circumstances  each  community  will  be  able  to  float  an 
increasing  volume  of  money  as  lon^  as  confidence  con- 
tinues. The  local  character  of  the  currency  may  prove 
an  actual  disadvantage  in  more  ways  than  one.  As  it 
does  not  go  far  from  home,  it  will  circulate  altogether 
too  freely  among  people  who  have  a  patriotic  pride  in  not 
presenting  it  for  redemption.     In  the  old  days  of  state 


V 

T 


CONTROL    OF  NOTE  ISSUE.  25  I 

bank  issues,  the  customer  who  tested  the  solvency  of  a 
bank  by  presenting  its  notes  for  redemption  was  looked 
upon  in  the  light  of  a  public  enemy.  If  he  wanted  coin 
for  foreign  travel  or  any  purpose  for  which  the  local  bank 
issues  were  unavailable,  he  was  obliged  to  explain  his 
reasons  in  order  not  to  become  an  object  of  suspicion. 
These  disadvantages,  combined  with  those  which  arise 
from  the  absence  of  any  power  of  control  on  the  part  of 
the  central  government,  usually  outweigh  the  merits 
claimed  for  local  banks  of  issue. 

§  279.  Centralized  control  of  banking  and  bank  note 
issues  has  worked  somewhat  better ;  yet  it  has  by  no 
means  avoided  the  evils  and  dangers  which  have  been 
described.  The  United  States  banks  of  1791  and  1816 
had  a  checkered  career,  and  did  much  to  heighten  specu- 
lative activity  at  the  very  times  when  restriction  of  such 
activity  was  most  needed.  Even  the  Bank  of  England 
has  more  than  once  been  open  to  a  similar  criticism. 
Experience  proves  that  the  mere  existence  of  centralized 
organization  is  not  enough  to  prevent  abuse  unless  strict 
legislative  limits  are  placed  on  the  issue  of  bank  notes. 

§  280.  The  actual  choice  between  local  and  centralized 
banking  has  usually  been  determined  by  political  consid- 
erations rather  than  by  economic  ones.  When  a  govern- 
ment has  needed  the  help  of  a  strong  banking  house,  in 
order  to  borrow  money  or  perform  other  necessary  finan- 
cial operations,  it  has  given  special  privileges  to  any  bank 
or  group  of  banks  that  would  help  it  in  this  matter,  and 
has  correspondingly  restricted  all  bankers  outside  of  such 
an  association.  When,  however,  the  immediate  financial 
need  is  over  and  the  local  demands  for  increased  banking 
privileges  prove  strong,  the  government  has  usually  been 
unable  to  resist  the  pressure  of  such  local  demands,  and 
has  annulled  or  modified  the  exclusive  privileges  given  in 
times  of  financial  stress.  Only  after  long  experience  of 
the  evils  of  both  systems  have  nations  learned  to  develop 


252  CREDIT. 

well  defined  lines  of  legislative  policy  whieh  are  guided 
by  far-sighted  commercial  intelligence  rather  than  by  the 
pressure  of  political  influence. 

§  281.  The  Bank  of  England  was  established  in  1694. 
It  grew  out  of  the  necessity  of  the  English  government 
for  a  loan  of  ;^  1,200,000.  In  1708  it  was  given  an  impor- 
tant monopoly  by  an  act  prohibiting  companies  of  more 
than  six  persons,  with  the  exception  of  the  Bank  of  Eng- 
land, from  issuing  notes  or  bills  of  credit.  This  restriction, 
however,  did  not  extend  to  Scotland  or  Ireland.  In  the 
latter  country  especially,  bank  note  issues  of  large  amount 
were  put  forth  by  irresponsible  parties.  Nor  did  the 
restriction  of  1708  suffice  to  prevent  the  issue  of  notes  by 
country  banks  in  England.  At  the  close  of  the  last  cen- 
tury, the  English  bank  note  currency  was  so  inflated  that 
a  crisis  took  place  in  1792  and  1793,  and  a  suspension  of 
specie  payments  in  1797  which  lasted  for  twenty-four 
years.  In  spite  of  the  experience  of  this  period,  the 
directors  of  the  Bank  of  England  made  no  efficient 
attempts  to  check  the  speculation  of  the  years  1824 
and  1825.  In  September  of  the  latter  year  there  was 
a  severe  commercial  crisis,  which  at  one  time  threatened 
to  reduce  the  country  to  a  state  of  barter.  Amid  the 
efforts  to  prevent  the  recurrence  of  such  evils  there  was  a 
temporary  movement  in  favor  of  decentralized  banking ; 
but  it  accomplished  very  little.  No  radical  reform  was 
effected  until  Sir  Robert  Peel's  Act  of  1844.  By  this 
Act  discretionary  power  over  the  issues  of  paper  money 
was  taken  out  of  the  hands  of  English  bank  author- 
ities. The  country  banks  were  absolutely  forbidden  to 
increase  the  small  circulation  which  they  had  outstand- 
ing at  the  time  of  the  passage  of  the  Act.  The  Bank 
of  England  was  allowed  to  issue  ^14,000,000  (afterwards 
increased  to  ;^  16,000,000  to  take  the  place  of  circulation 
surrendered  by  some  of  the  country  banks),  on  the  basis 
of  securities,  chiefly  British  Public  Funds,  which  it  held 


BANK  NOTES  IN  ENGLAND.  253 

in  its  coffers.  Every  note  beyond  this  was  to  be  based  on 
an  equal  amount  of  coin  or  bullion  placed  in  the  hands  of 
the  bank.  If  the  Bank  of  England  has  i^28,ooo,ooo  of 
notes  outstanding,  it  indicates  that  there  are  ;^i2,cxx),ooo 
of  coin  or  bullion  on  deposit  in  the  bank.  It  is  not 
allowed  to  vary  its  note  issue  on  the  basis  of  the  wants  of 
trade,  real  or  supposed.  Changes  in  the  amount  of  notes 
outstanding  are  based  on  equivalent  changes  in  the 
amount  of  coin  deposited.  To  all  intents  and  purposes 
the  Bank  of  England  notes  are  of  the  nature  of  gold  cer- 
tificates (§  214),  The  Act  of  1844  makes  the  volume  of 
currency  in  Great  Britain  depend  on  movements  of  coin 
or  bullion,  and  not  on  the  discretion  of  bank  authorities 
in  issuing  notes. 

This  Act  was  vehemently  criticised  at  the  time  of  its 
passage.  Its  opponents  urged  that  a  currency  which  was 
secured  by  proper  banking  reserves '  would  be  equally 
convertible  with  that  contemplated  by  Peel's  Act  and 
much  more  elastic.  This  criticism  found  considerable 
confirmation  in  England's  experience  during  the  crises 
of  1847,  1857,  and  1866.  On  two  of  these  occasions  the 
restriction  on  the  note  issues  of  the  Bank  of  England  was 
suspended  by  authority  of  Parliament,  and  a  discretionary 
power  was  given  which  it  had  been  the  purpose  of  the 
Act  of  1844  to  take  away.  In  the  third,  measures  were 
taken  by  bank  authorities  which  were  based  on  the  prob- 
ability of  such  parliamentary  action.  In  all  these  cases 
the  bank  issued  notes  more  freely  than  was  consistent 
with  the  operation  of  the  Act  of  1844,  thereby  relieving 
commercial  stringency  and  preventing  great  public  cal- 
amities. Yet  this  fact,  as  we  shall  presently  see,  does 
not  prove  that  the  Act  was  useless  or  undesirable. 

§  282.  In  Scotland  there  was  no  such  monopoly  of  note 

*  Notes  thus  protected  are  said  to  be  secured  on  the  "  banking  principle," 
while  notes  which  can  only  be  issued  on  an  actual  deposit  of  coin  are  pro- 
tected by  what  is  known  as  the  "  currency  principle." 


254  CREDIT. 

issue.  Banks  were  allowed  discretion  to  advance  notes  to 
individual  borrowers.  The  convertibility  of  the  note  and 
the  solvency  of  the  bank  were  thought  sufficient  safe- 
guards to  prevent  the  danger  of  over-issue.  The  system 
seems  to  have  worked  well ;  but  the  Act  of  1844  was  ap- 
plied to  Scotland  as  well  as  to  England  and  took  away 
the  rights  of  the  banks  to  make  uncovered  issues  beyond 
the  amount  then  outstanding.  The  principle  of  the  old 
Scotch  system  is  carried  out  in  Canada  at  the  present 
day.  The  Canadian  banks  are  allowed  to  issue  notes  up 
to  the  limit  of  their  capital.  Every  facility  is  afforded 
the  note  holder  to  present  his  notes  for  redemption  ;  and 
it  is  believed  that  this  facility  of  redemption  furnishes  an 
adequate  safeguard  against  inflation. 

§  283.  The  Bank  of  France  was  established  at  the 
beginning  of  this  century.  Down  to  1848  it  shared  the 
right  of  note  issue  with  certain  departmental  banks.  By 
laws  passed  in  that  year  these  banks  were  consolidated 
with  the  Bank  of  France,  which  has  since  had  a  monopoly 
of  the  note  issues  in  that  country  ;  a  power  which  it  has 
on  the  whole  exercised  with  great  wisdom.  During  much 
of  its  history  there  has  been  no  statutory  limit  to  its  note 
issue  ;  the  existing  limit  is  about  $800,000,000.' 

§  284.  Prior  to  the  consolidation  of  the  German  Empire, 
the  banks  of  that  country  were  necessarily  local,  and  their 
issues  could  circulate  in  comparatively  small  districts 
only.  The  establishment  of  an  imperial  bank  in  1875  was 
dictated  by  considerations  of  national  policy.  The  local 
bank  note  issues  were  not  stopped,  but  are  subjected  to 
strict  control,  and  the  imperial  bank  has  charge  of  nearly 
two-thirds  of  the  note  circulation  of  the  empire.  One- 
third  of  the  note  issue  must  be  protected  by  a  coin  re- 
serve. If  the  difference  between  the  issue  and  the  reserve 
exceeds  $70,000,000,''  an  annual  tax  of  five  per  cent  is 
levied  upon  the  excess.   More  reliance  seems  to  be  placed 

'  4,ooo,cxx5,ooo  francs.  '  296,000,000  marks. 


BANK  NOTES  IN  AMERICA.  255 

on  general  supervision  of  the  management  of  the  affairs 
of  the  bank,  and  less  on  specific  restrictions  affecting  the 
reserve  or  the  note  issue,  than  is  the  case  in  England 
or  the  United  States. 

§  285.  The  first  United  States  bank  was  established  in 
1 79 1,  chiefly  for  the  purpose  of  assisting  the  government 
in  its  financial  operations.  Its  charter  expired  in  181 1  ; 
but  in  18 16  a  second  bank  was  organized  on  a  similar  plan 
and  with  the  same  general  objects.  The  formation  of 
the  United  States  bank  simply  established  an  accredited 
fiscal  agent  of  the  government ;  it  did  not  prevent  note 
issues  by  state  banks.  These  issues  were  large  in  amount 
and  badly  secured.  The  charter  of  the  second  United 
States  bank,  owing  to  the  opposition  of  President  Jackson, 
expired  in  1836,  but  it  continued  business  under  the  laws 
of  the  State  of  Pennsylvania,  and  took  an  unenviable  part 
in  the  speculations  which  led  to  the  commercial  crisis 
immediately  following.  No  United  States  bank  was 
afterward  established ;  but  the  issue  of  state  bank  notes, 
usually  with  inadequate  supervision,  continued  until  the 
Civil  War. 

§  286.  The  first  improvement  in  the  state  bank  system 
originated  in  Massachusetts,  where  a  number  of  banks 
established  a  common  agency  for  the  redemption  of 
notes,  with  a  view  to  the  prevention  of  irresponsible 
issues.  A  further  reform  was  made  in  New  York  in  1838, 
by  a  law  which  compelled  the  banks  to  hold  United  States 
or  state  securities,  or  real-estate  mortgages,  of  an  amount 
equal  to  the  value  of  the  notes  issued,  and  to  deposit 
them  with  the  State  Treasurer  as  a  pledge  for  the  ultimate 
redemption  of  those  notes.'     As  long  as  the  securities 

'  This  feature  of  the  New  York  law,  which  also  lies  at  the  basis  of  the 
National  Bank  law,  is  known  as  the  the  "safety-fund  system."  The 
plan  of  redemption  used  in  Massachusetts  is  commonly  designated  as  the 
"Suffolk  system"  from  the  name  of  the  bank  which  acted  as  a  general 
redemption  agency. 


256  CREDIT. 

thus  deposited  were  worth  what  they  purported  to  be,  the 
ultimate  soundness  of  the  notes  was  secured. 

§  287.  In  the  years  1863  and  1864,  under  stress  of  the 
Civil  War,  it  became  desirable  to  place  large  government 
loans  upon  the  market.  With  this  end  in  view,  special 
facilities  for  note  issue  under  national  authority  were 
offered  to  banks  that  would  subscribe  to  United  States 
bonds;  and  in  1865  all  note  issues  under  any  other 
authority  were  virtually  prohibited  by  a  tax  of  ten  per 
cent  on  the  use  of  State  bank  notes.  To  avoid  the 
imposition  of  this  tax  upon  their  note  issues,  banks 
were  compelled  to  surrender  their  state  charters  and  ac- 
cept in  their  place  charters  under  the  National  Bank  Act 
of  1864.  Under  this  Act  they  were  to  invest  one-third 
of  their  capital  in  United  States  bonds,  to  be  deposited 
in  the  Treasury.  Besides  receiving  interest  on  these  bonds 
as  it  became  due,  they  were  given  the  right  to  issue  notes 
to  the  amount  of  90  per  cent  of  the  face  value  of  the  bonds 
— unless  the  bonds  should  depreciate,  in  which  case  the 
amount  of  notes  was  to  be  correspondingly  reduced. 
Provision  was  also  made  for  the  redemption  of  national 
bank  notes  by  the  agents  of  the  government,  in  conform- 
ity with  the  Massachusetts  system  already  described. 

This  plan  made  it  certain  that  the  national  bank  notes 
would  be  fully  as  good  as  the  United  States  bonds  on 
which  they  were  based.  Inasmuch  as  these  bonds  have 
always  commanded  a  premium,  there  has  never  been  any 
doubt  as  to  the  soundness  of  the  currency  issued  under 
this  system.  With  regard  to  its  volume  there  have  been 
many  complaints.  For  some  years  the  banks  were  anx- 
ious to  increase  their  circulation,  and  a  limitation  on  the 
total  amount  which  they  were  allowed  to  keep  outstand- 
ing was  considered  a  hardship.  After  1880,  on  the  other 
hand,  the  price  of  the  United  States  bonds  became  so 
high  as  to  render  the  maintenance  of  the  circulation  un- 
profitable, and  a  large  amount  was  surrendered,  reducing 


AN  EMERGENCY  RESERVE,  2^'J 

the  total  volume  of  the  bank  note  issues  to  a  figure  less 
than  half  of  that  which  the  law  would  have  allowed.' 

§  288.  It  is  urged,  both  against  the  English  and  Ameri- 
can systems,  that  they  are  based  on  no  philosophical  or 
economic  principle.  Each  of  them  limits  the  issue  of 
bank  notes  by  a  somewhat  arbitrary  line.  Instead  of 
furnishing  an  elastic  currency  that  will  expand  or  con- 
tract with  the  demands  of  business,  they  furnish  a  highly 
inelastic  one.  In  England  there  is  no  available  means  of 
increasing  the  circulation  except  by  suspending  the  Act 
of  1844.  It  has  been  pointedly  said  that  the  English 
Bank  Act  is  of  use  only  when  it  is  rendered  inoperative. 
What  is  done  in  England  by  suspension  of  the  Bank 
Act  is  done  in  America  by  the  issue  of  clearing  house 
loan  certificates '  in  virtual  disregard  of  the  National 
Banking  Law.  Each  of  these  things  represents  a  breach 
of  the  statutory  principle,  justified  only  by  a  public 
emergency. 

§  289.  Yet  the  necessity  of  thus  suspending  limitations 
in  an  emergency  does  not  prove  that  the  limitations 
themselves  are  unwise.  The  most  important  function  of 
bank  note  issues,  in  a  country  which  enjoys  the  benefits 
of  the  check  and  clearing  house  system,  is  to  provide  a  re- 
serve for  emergencies.  If  we  limit  note  issues  in  ordinary 
times  we  have  a  reserve  power  upon  which  we  can  fall  back 
in  extraordinary  times.  The  objection  to  unlimited  bank 
note  issues  is  that  they  leave  us  no  such  reserve  to  fall  back 

'  The  effect  of  this  reduction  was  to  leave  room  for  other  forms  of  cur- 
rency to  take  the  place  of  bank  note  issues  thus  withdrawn  from  cir- 
culation. 

*  In  times  of  great  stringency  the  New  York  Clearing  House  Association 
has  allowed  its  members  to  deposit  securities  with  its  loan  committee  and 
receive  in  return  ' '  Clearing  House  Loan  Certificates  "  for  75  per  cent,  of  their 
par  value.  These  certificates  are  accepted  in  lieu  of  cash  in  payment  of 
balances  at  the  Clearing  House,  and  set  a  corresponding  amount  of  actual 
cash  free  for  general  business  purposes.  In  the  crisis  of  1893  other  clearing 
houses  resorted  to  this  measure.  The  whole  subject  is  admirably  handled 
by  Horace  "White,  Money  and  Banking,  pp.  244-248. 


258  CREDIT. 

upon.  If  the  currency  is  made  thoroughly  elastic  in  years 
of  confidence,  there  is  no  power  of  stretching  it  further  in 
days  of  doubt.  If  the  check  system  alone  has  been  over- 
strained, a  bank  that  has  the  power  to  issue  additional 
notes  can  ease  public  confidence.  But  if  the  public  de- 
mand for  the  use  of  notes  as  well  as  checks  has  been 
supplied  to  the  utmost,  we  have  no  further  reserve  at  our 
disposal.  For  this  reason  an  unphilosophical  limit  to  note 
issues  is  far  better  than  no  limit  at  all.  People  may  com- 
plain that  the  currency  does  not  adapt  itself  to  the  need 
of  a  certain  place  or  a  certain  time  ;  but  on  ordinary 
occasions  this  defect  may  be  made  up  by  an  extension  of 
the  use  of  checks.  At  such  times  the  receiver  of  a  check 
can  readily  satisfy  himself  whether  the  man  who  makes 
payments  in  this  form  is  financially  solvent  or  not.  If  he 
is  in  danger  of  failure,  there  will  be  special  reasons  which 
make  such  danger  imminent,  and  against  whose  operation 
the  commercial  community  can  protect  itself.  But  in 
extraordinary  times  of  stringency,  any  man  is  liable  to 
fail ;  no  man  can  be  sure  that  his  checks  will  be  received. 
It  is  in  such  emergencies  that  notes  must  be  substituted 
for  checks  in  order  to  prevent  an  unlimited  stringency 
and  a  disastrous  panic.  On  these  occasions  additional 
issues  of  bank  notes  are  not  merely  a  public  conven- 
ience, but  a  public  necessity.  The  advantages  of 
having  such  a  reserve  power  at  command  during  one 
month  out  of  every  fifty  far  outweighs  the  very  slight 
disadvantage  of  being  unable  to  substitute  notes  for 
checks  during  the  other  forty-nine.  To  prevent  the  re- 
currence of  experiences  like  those  of  1825  in  England 
or  1857  i"  the  United  States,  the  important  thing  is  to 
have  a  limit  on  note  issue,  even  if  it  be  an  arbitrary  one, 
and  to  have  it  low  enough.  Whether  it  should  be  as 
stringently  drawn  as  in  England,  where  to  all  intents  and 
purposes  a  bank  note  is  simply  a  certificate  of  deposit  of 
gold,  or  whether  we  should  allow  the  somewhat  wider  lib- 


V 

T 


GOVERNMENT  NOTES.  259 

erty  in  use  in  the  United  States,  is  open  to  question. 
Probably  it  does  not  make  so  much  difference  with  busi- 
ness as  might  appear  on  the  surface.  England  has  fewer 
bank  notes,  but  this  does  not  cause  a  less  proportion  of 
her  business  to  be  done  on  credit.  Checks  are  substituted 
for  notes,  and  the  proportion  of  transactions  settled  by 
handling  of  actual  coin  or  coin  certificates  is  even  smaller 
in  England  that  in  the  United  States.  Paradoxical  as  it 
may  appear,  the  all-important  thing  is  that  the  bank  note 
currency  should  not  meet  the  wants  of  business  in  ordi- 
nary times ;  that  it  should  not  be  suflficiently  elastic  at 
such  times  as  to  be  unable  to  take  additional  strain  in 
times  of  emergency.' 

§  290.  If,  as  experience  shows,  the  right  of  note  issue  is 
a  dangerous  power  to  place  in  private  hands,  some  people 
think  that  the  best  way  to  avoid  this  danger  is  by  having 
the  government  take  that  power,  instead  of  trying  to  re- 
strict somebody  else  in  its  exercise. 

Those  who  urge  this  view  of  the  matter  say  that  the 
government  by  making  its  own  note  issues  would  com- 
bine protection  to  the  people  with  profit  to  the  treasury. 
A  bank,  by  keeping  a  reserve  of  thirty  per  cent  of  its 
outstanding  notes,  earns  interest  on  the  other  seventy 
per  cent  without  furnishing  any  corresponding  amount  of 
capital.  Why  should  not  the  government  avail  itself  of 
this  chance  of  getting  something  for  nothing  ?  A  fortiori, 
if  the  bank  has  been  allowed  tt)  secure  its  note  issues  by 
the  purchase  and  deposit  of  government  bonds  and  thus 

'  Political  reasons  may  sometimes  make  it  wise  to  allow  freer  issues  of  bank 
notes  than  can  be  defended  on  strictly  economic  grounds.  The  advantages  of 
bank  issues  over  government  issues  are  so  great  that  it  may  become  advisable 
to  increase  the  volume  of  the  former  as  a  means  of  forestalling  a  demand  for 
the  latter.  In  these  circumstances  there  is  much  to  be  said  in  favor  of  any 
well-considered  plan  by  which  the  banks  can  issue,  under  public  supervision, 
notes  based  on  securities  of  unquestioned  value  ;  paying  a  tax  on  their  circu- 
lation sufficient  to  furnish  a  fund  which  will  protect  the  community  against 
loss  to  the  note-holders  from  the  mismanagement  of  any  individual  bank. 


26o  CREDIT. 

earn  double  interest  on  the  securities  and  on  the  notes 
outstanding,  why  should  not  the  government  appropriate 
this  profit  to  itself  instead  of  giving  such  a  premium  to 
the  banks  ? 

§  291.  To  these  points  it  may  be  answered,  first,  that 
much  of  the  profit  to  the  banks  from  such  transactions  is 
apparent  rather  than  real.  The  best  proof  of  this  is 
found  in  the  fact  that  so  many  of  the  national  banks  of 
the  United  States  have  surrendered  their  circulation, 
finding  that  they  could  employ  their  capital  more  profit- 
ably in  discount  and  deposit  business  than  in  the  pur- 
chase of  government  securities  and  the  issue  of  notes. 
The  expense  of  the  operations  connected  with  the  busi- 
ness of  note  issue  is  apt  to  eat  up  the  alleged  double 
profits.  In  the  second  place,  if  the  government  should 
take  this  business  out  of  the  hands  of  the  banks,  the 
apparent  profit  that  it  would  derive  from  such  transac- 
tions would  be  outweighed  by  certain  indirect  losses. 
The  existence  of  a  large  body  of  outstanding  notes, 
guaranteed  by  the  government  and  secured  only  by  a 
fractional  reserve,  involves  a  loss  to  the  credit  of  the 
government  and  an  increase  in  the  rate  of  interest  which 
it  must  pay  on  all  other  parts  of  its  national  debt.  If 
the  government  took  two  hundred  million  dollars  of  cir- 
culation out  of  the  hands  of  the  national  banks  and  held 
a  reserve  of  sixty  million  to  protect  it,  it  would  earn 
interest  at  (say)  five  per  cent  on  one  hundred  and  forty 
million  dollars,  or  seven  million  a  year.  If,  however,  as 
a  result  of  this  operation,  the  rate  of  interest  on  the 
national  debt  in  general  were  one  per  cent,  higher  than 
would  otherwise  be  the  case  (and  this  is  not  an  improb- 
able supposition),  there  would  be  a  loss  of  one  per  cent 
on  a  thousand  million  dollars.  This  loss  of  ten  million 
would  outweigh  the  gain  of  seven  million  connected  with 
the  assumption  of  the  banking  business  by  the  govern- 
ment, and  leave  a  deficit  of  three  million.     The  exceed- 


DANGERS  IN  GOVERNMENT  NOT^S.  26 1 

ingly  low  rate  of  interest  on  the  loans  to  the  English 
government  is  largely  connected  with  the  fact  that  that 
government  does  not  guarantee  any  paper  currency  on 
the  banking  principle,  directly  or  indirectly.  England's 
gain  from  this  source  almost  certainly  outweighs  any 
loss  of  possible  interest  which  might  be  earned  by  float- 
ing the  currency  on  a  fractional  reserve.  If  this  is  true 
at  ordinary  times,  it  is  most  conspicuously  true  in  emer- 
gencies. When  the  revenues  of  the  government  are 
deficient  in  amount,  the  existence  of  a  circulation  guar- 
anteed by  the  treasury  and  protected  only  by  a  frac- 
tional reserve  constitutes  a  public  danger.  This  is  the 
time  when  people  will  want  coin  instead  of  notes,  and  it 
is  just  the  time  when  the  government  cannot  give  them 
the  coin  in  exchange  for  the  notes  without  resorting  to 
a  loan  on  more  or  less  unfavorable  terms.  If  the  gov- 
ernment finds  itself  face  to  face  with  a  war  instead  of  a 
commercial  crisis,  these  diflRculties  are  multiplied.  Every 
dollar  of  notes  over  and  above  the  stock  of  coin  or  bullion 
available  for  their  redemption  is  under  such  circumstances 
a  source  of  weakness  to  the  government  when  it  most 
needs  strengthening.  If  it  has  an  accumulated  supply  of 
cash  assets,  it  can  tide  over  the  initial  stages  of  the  war, 
until  advantageous  arrangements  have  been  made  for 
placing  loans  and  obtaining  other  means  of  meeting  the 
extraordinary  expenses.  But  if  instead  of  such  a  reserve 
there  is  an  absolute  deficiency  and  an  excess  of  liabilities 
over  assets,  the  finances  are  embarrassed  from  the  very 
outset,  and  the  war  burdens  indefinitely  increased. 

§  292.  Side  by  side  with  the  fiscal  reasons  why  the 
government  should  not  attempt  to  carry  on  the  work 
of  bank  note  issue  for  itself,  there  are  equally  important 
commercial  ones.  The  treasury  department  is  not  well 
situated  for  doing  a  banking  business.  It  has  no  means 
of  getting  currency  into  circulation  where  it  is  wanted,  or 
of  retiring  it  when  it  is  no  longer  wanted.     A  bank  every 


262  a  CREDIT. 

day  handles  commercial  bills  and  other  evidences  of  the 
need  of  money.  Its  assets  are  of  such  a  kind  that  they 
can  be  used  either  for  putting  currency  into  circulation  or 
withdrawing  it  from  circulation.  The  assets  of  the  gov- 
ernment are  of  a  totally  different  character.  They  furnish 
no  indication  of  the  volume  of  currency  needed.  If  the 
government  attempts  to  issue  notes  on  the  basis  of  its  own 
property  or  the  property  of  the  country,  quick  inflation 
is  the  result.  The  limit  of  power  of  the  treasury  to 
maintain  specie  payment  for  such  notes  is  soon  reached. 
When  the  government  comes  to  that  limit,  the  tempta- 
tion to  suspend  specie  payments  and  declare  the  notes 
legal  tender  is  enormous.  If  this  is  once  done  there  is 
no  limit  to  the  issue  of  more  notes,  but  a  very  speedy 
restriction  of  their  commercial  utility.  The  assignats  of 
the  French  revolutionary  government  were  avowedly 
secured  by  the  value  of  confiscated  lands  which  it  held. 
But  this  set  no  limit  to  their  inflation.  To  avoid  over- 
issues of  notes,  they  must  be  based,  not  on  some  form  of 
property  whose  value  is  measured  in  money,  but  on  some- 
thing which  can  be  used  as  money  itself  and  which  will 
at  once  be  taken  out  of  the  hands  of  the  government 
when  people  begin  to  distrust  the  value  of  government 
promises. 

§  293.  Proposals  are  occasionally  made  that  the  United 
States  government  should  issue  notes  on  the  basis  of  pro- 
ducts entrusted  to  its  hands  ;  the  notes  to  be  retired  as 
soon  as  the  products  are  withdrawn,  and  the  proportion 
of  such  notes  to  the  value  of  the  product  deposited  to  be 
kept  low  enough  to  ensure  the  government  against  loss 
and  stimulate  the  owner  to  dispose  of  his  goods  as  soon 
as  he  conveniently  can.  The  Farmers'  Alliance  lays  great 
stress  on  a  project  of  this  kind.  Such  a  plan,  if  carefully 
carried  out,  would  do  very  little  good  or  harm.  But  the 
chance  of  its  being  carefully  carried  out  is  not  one  in  a 
thousand.     The  motive  which  lies  back  of  its  advocacy  is 


FALSE  EXPECTATIONS  OF  HEL^.  263 

the  desire  to  raise  prices,  coupled  with  the  belief  that 
prices  are  being  unduly  depressed  by  combinations  of 
capitalists  who  hold  money  back.  It  is  not  the  tem- 
porary difficulty  of  getting  money,  but  the  permanent 
difficulty  of  getting  more  money  than  consumers  are 
willing  to  pay,  which  constitutes  the  chief  cause  of 
demand  for  government  intervention.  If  safe  action  on 
the  part  of  the  government  does  not  make  the  currency 
larger  than  it  is  with  safe  action  on  the  part  of  the  banks, 
the  whole  reason  for  the  scheme  will  fall  to  the  ground. 
In  itself,  it  would  be  neither  good  nor  bad.  But  it 
would  involve  the  existence  of  a  system  of  governmental 
machinery  which  with  slight  changes  in  the  law  could  be 
made  to  inflate  the  currency  under  the  guise  of  pro- 
moting credit ;  and  this  would  be  a  perpetual  menace 
to  the  commercial  stability  of  a  country  which  adopted  it. 


CHAPTER  IX. 

PROFITS. 

Competition  among  Investors — The  Rate  of  Interest — Causes  of  Variation 
— Economic  Rent — Net  Profits  and  Losses — Commercial  Crises. 

E.  V.  Boehm-Bawerk  :  "  Capital  and  Interest,"  "  The  Positive  Theory  of 
Capital."  (Innsbruck,  1884,  1889.)  Translated  by  W.  Smart.  London, 
i8go,  1891. 

§  294.  If  only  one  capitalist  is  engaged  in  the  produc- 
tion of  an  article,  any  labor-saving  improvement  which  he 
may  apply  will  give  him  an  obvious  advantage.  He  will 
sell  his  product  at  a  high  rate,  and  pay  for  his  labor  at  a 
low  rate.  The  difference  between  the  two,  which  consti- 
tutes his  gross  profit,  may  be  very  large. 

But  the  amount  of  this  profit  invites  other  competitors 
to  enter  the  field.  They  will  increase  the  supply  of  the 
product,  and  thereby  drive  prices  down  ;  they  \vill  increase 
the  demand  for  labor,  and  thus  tend  to  force  wages  up. 
This  process  will  continue  as  long  as  the  excess  of  price 
above  wages  furnishes  a  sufficient  motive  to  attract  capi- 
tal ;  in  other  words,  as  long  as  the  market  price  is  above 
the  normal  price. 

§  295.  Let  Oa  represent  the  minimum  price'  which  any 

'  This  figure  differs  from  those  in  chapters  iii  and  iv,  in  having  the  axes 
reversed,  so  that  horizontal  lines  represent  quantities  and  vertical  lines  repre- 
sent prices.  This  has  been  done  because  it  is  customary  in  mathematical 
diagrams  to  represent  causes  by  horizontal  lines  and  effects  by  vertical  ones. 
In  chapter  iii  we  treated  price  variations  as  the  causes  and  showed  their 
effects  on  quantities  produced  and  consumed.  Here  we  treat  the  quantities 
produced  and  consumed  as  the  causes  which  determine  the  price  that  can  be 
charged.     Hence  the  reversal  of  axes. 

264 


COMPETITION  AMONG  SPECULATORS. 


26: 


laborer  is  willing  to  accept  for  his  services  in  producing  an 
article,  and  Ob  the  maximum  price  which  any  consumer  is 
willing  to  pay  for  this  article.    If  only  one  such  thing  is  pro- 


duced the  capitalist  will  make  a  very  large  profit — no  less 
than  the  whole  difference  between  the  minimum  cost  Oa 
and  the  maximum  price  Ob.  But,  with  industrial  as  with 
commercial  speculation,  the  success  of  one  operation  paves 
the  way  for  others  (§115);  and  as  these  operations  become 
more  numerous,  the  margin  of  profit  becomes  narrower. 
If  aa'  represents  the  supply  curve  of  labor  (§  94),  so  that 
any  desired  quantity  of  labor  Oq  can  only  be  obtained  at  a 
price  qy,  and  bb'  represents  the  demand  curve  for  the 
products  of  this  labor,  so  that  the  results  of  Oq  can  only 
be  sold  at  the  price  qx,  it  is  obvious  that  the  margin  yx 
becomes  narrower  as  the  quantity  of  production  increases. 
When  the  amount  of  productive  labor  reaches  Or,  the 
selling  price  of  the  product  only  equals  the  amount  of 
wages  paid,  and  there  is  no  possible  inducement  for  capi- 
talists to  extend  their  operations.  In  fact,  they  will  not 
wish  to  go  as  far  as  this  point ;  for  at  Or  they  simply 
recover  what  they  advance,  with  no  compensation  for  the 
risks  which  are  always  involved.  To  assume  these  risks, 
they  must  have  some  adequate  motive.  They  will  not 
care  to  employ  labor  unless  they  expect  it  to  yield  them 
a  margin  of  profit  xy  after  replacing  the  capital  advanced. 
If  this  margin  attracts  possessors  of  capital  enough  to  em- 


266  PROFITS.       . 

ploy  an  amount  of  labor  Oq  at  a  price  qy,  the  product  will 
be  furnished  to  the  consumers  at  a  price  qx.  The  com- 
petition of  different  sellers  will  create  a  market  price  for 
products  which  will  render  it  unnecessary  for  any  buyer 
to  pay  more  than  qx ;  the  competition  of  different  em- 
ployers will  create,  though  in  less  perfect  fashion,'  a  market 
i;^te  of  wages,  which  will  render  it  unnecessary  for  any 
laborer  to  accept  less  than  qy. 

Under  these  circumstances  we  have 

(i)  The  area  Oqya  representing  the  amount  which  dif- 
ferent laborers  would  be  prepared  to  accept. 

(2)  The  area  (9^jw  representing  the  amount  which  com- 
petition enables  them  to  get. 

(3)  The  area  Oqxb  representing  the  amount  which  dif- 
ferent consumers  would  be  prepared  to  pay. 

(4)  The  area  Oqxp  which  competition  allows  them  to  pay. 

The  difference  pxb  between  what  consumers  are  pre- 
pared to  pay  and  what  they  actually  do  pay  may  be 
treated  without  great  error  as  illustrating  the  consumers' 
gain  or  surplus  from  the  process  of  production."  The  dif- 
ference ayw  between  what  laborers  are  prepared  to  receive 
and  what  they  actually  do  receive,  may  in  like  manner  be 
treated  as  the  laborers'  gain  or  surplus.  The  area  wxyp 
represents  the  total  profit  of  the  capitalists  who  have 
brought  the  operation  to  a  successful  conclusion.  The 
ratio  of  xy  (profit)  to  yq  (capital  advanced)'  is  the  per- 
centage of  profit  on  the  transaction.  If  the  time  which 
elapses  between  the  rendering  of  labor  and  the  sale  of 
the  product  is  one  year,  this  percentage  represents  the 

'  This  incompleteness  of  competition  for  labor  is  due  chiefly  to  the  fact 
that  different  producers  apply  their  labor  under  very  different  conditions. 
For  purposes  of  illustration,  we  have  for  the  moment  ignored  these  dif- 
ferences. 

'  These  illustrations  find  their  chief  practical  use  when  we  study  the  inci- 
dence of  taxation  (chapter  xiv). 

'  Note  that  the  amount  advanced  by  capitalists  as  a  class  is  neither  more 
nor  less  than  the  sum  of  wage-payments  (§  139). 


DIFFERENT  ELEMENTS  IN  PROFIT.  267 

rate  of  profit,  as  it  is  ordinarily  expressed.  If  the  time  be 
longer  or  shorter  than  one  year,  the  ratio  must  be  corre- 
spondingly reduced  or  increased  to  bring  it  down  or  up 
to  the  year's  time  unit  as  a  basis  of  measurement. 

§  296.  It  rarely  happens  that  the  case  is  so  simple  as 
this  illustration  assumes.  Different  units  of  product  do 
not  as  a  rule  involve  the  same  amounts  of  labor.  In  some 
cases  the  amount  paid  in  wages  is  far  less  than  the  selling 
price ;  in  others,  the  margin  is  very  narrow.  Part  of 
these  differences  may  be  explained  by  the  difference  in 
time  which  elaoses  between  the  application  of  labor  and 
the  sale  of  the  product.  If  one  capitalist  waits  twice  as 
long  as  another  and  by  so  doing  obtains  double  the 
amount  of  profit,  the  rate  of  profit  of  the  two  men  is 
approximately  the  same.  But  after  making  all  proper 
allowances  for  differences  in  time,  there  remain  other  dif- 
ferences, due  to  superior  foresight  in  investment  or  skill 
in  management,  which  make  the  profits  on  capital,  in  its 
different  applications,  take  a  very  wide  range.  Instead  of 
a  fixed  rate  of  profit,  as  the  result  of  competition,  we  find 
an  extremely  variable  one. 

§  297.  Wherever  the  system  of  interest  prevails,  it  is 
customary  to  explain  these  differences  by  analyzing  profits 
into  several  parts,  each  governed  by  laws  of  its  own.  If 
the  prevailing  rate  of  interest  on  good  security  in  a 
certain  market  is  five  per  cent,  and  a  concern  with  an 
invested  capital  of  a  hundred  thousand  dollars  shows  a 
gross  profit  of  eight  thousand  dollars  in  the  course  of  a 
year,  we  consider  five  thousand  dollars  as  interest  on 
the  capital  invested,  and  the  other  three  thousand  as  sur- 
plus gain.  If  this  surplus  is  due  to  excellence  of  location 
we  call  it  economic  rent ;  if  it  is  due  to  superiority  of 
management  we  call  it  net  profit.  We  thus  separate  the 
gross  profits  into  three  elements  : 

(i)  A  payment  for  capital  "known  as  i?tterest. 

(2)  A  payment  for  location  known  as  rent. 


268  PROFITS, 

(3)  A  payment  for  skill  known  as  net  profit. 

These  distinctions  are  clear  and  important ;  but  there 
has  been  a  tendency  among  students  of  economics  to 
exaggerate  their  importance  and  their  clearness.  In 
dealing  with  these  various  elements  of  profit  we  have  to 
guard  ourselves  against  several  prevalent  fallacies  with 
regard  to  interest. 

§  298.  We  must  note,  in  the  first  place,  that  interest  is 
not  a  "  natural  "  return  for  capital  independent  of  skill. 
The  power  of  capital  to  yield  interest  is  dependent  upon 
the  skill  with  which  it  is  managed.  A  borrower  offers 
interest  because  he  thinks  that  he  has  the  ability  to  earn 
it.  The  rate  which  capital  commands  will  depend  pri- 
marily upon  the  borrowers  estimates  of  their  skill  in  this 
respect,  rather  than  upon  any  natural  or  inherent  quali- 
ties in  the  capital  itself.  Of  course  there  is  a  certain  con- 
formity between  the  borrowers'  estimates  for  the  future 
and  the  actual  experience  of  the  past ;  but  this  is  by  no 
means  so  close  as  some  writers  seem  to  assume. 

§  299.  In  the  next  place,  we  must  beware  of  confound- 
ing the  causes  which  have  established  the  system  of  inter- 
est with  those  that  determine  the  rate  of  interest.  It  is 
partly  with  the  object  of  avoiding  this  confusion  that  the 
writer  has  chosen  to  explain  the  development  of  the  sys- 
tem in  one  chapter  (§§  132-157)  and  to  discuss  the  deter- 
mination of  the  rate  in  another.  The  system  of  interest 
was  approved  by  jurists,  because  the  accumulation  and  use 
of  capital  was  advantageous  to  society  as  a  whole,  and  in- 
creased the  public  wealth  (§  3).  With  this  end  in  view, 
society  was  willing  to  offer  rewards  to  those  who  would  ab- 
stain from  destroying  wealth  and  would  use  it  productively. 
But  it  is  an  unwarranted  statement  that  the  amount  of  the 
reward  corresponds  or  ought  to  correspond  to  the  sacrifice 
involved  in  the  abstinence  or  to  the  increased  utility  of  the 
product.  The  idea  that  the  increase  oi public  wealth  will 
enable  anybody  to  pay  interest  is  justly  characterized  by 


WHO  PA  YS  II^TEREST.  269 

Boehm-Bawerk  as  a  "  naive  "  theory.  This  naive  theory 
furnishes  us  a  true  explanation  of  the  cause  of  the  system 
of  interest ;  but  it  does  not  touch  the  questions  involved 
in  the  determination  of  the  rate.  Society  is  anxious  to 
have  a  great  deal  of  capital  invested  for  the  sake  of  the 
resulting  gain  to  the  public  wealth.  It  does  not  under- 
take to  pay  a  corresponding  price,  or  in  fact  any  specified 
price  whatever,  for  the  capital  used  for  this  purpose.  It 
leaves  to  the  skill  of  the  investors  the  problem  of  deter- 
mining what  rate  they  shall  pay  for  the  use  of  one 
another's  capital. 

§  300.  For  we  must  constantly  note  that  interest  is  not 
paid  by  society  to  the  capitalists,  but  by  one  group  of  capi- 
talists to  another.  It  is  not  paid  for  capital,  but  for  the 
control  of  capital.  The  rate  depends  upon  the  relative 
number  of  capitalists  who  desire  such  control  and  of  those 
who  are  willing  to  part  with  it  for  a  fixed  consideration 
guaranteed  by  some  other  capitalist. 

In  any  large  industrial  enterprise  there  are  usually  two 
classes  of  investors,  represented  by  the  stockholders  and 
bondholders  of  a  railroad.  The  former  class  is  willing  to 
take  large  risks  for  the  chance  of  contingent  profits.  The 
latter  class  wants  security  of  return  and  is  quite  willing 
to  abandon  possible  chances  of  large  gain.  The  modern 
system  of  interest  is  nothing  more  than  the  recognition  of 
these  two  classes  of  investors  and  their  mutual  relations  ; 
the  rate  of  interest  is  the  outcome  of  a  bargain  between 
them.  Interest  results  from  a  contract  between  two  capi- 
talists uniting  in  a  common  enterprise.  It  is  a  sum  paid 
by  one  investor  to  another  investor — out  of  capital,  if 
necessity  shall  require.  If  the  borrower  has  not  capital 
enough  to  cover  such  contingent  necessity,  what  is  called 
interest  really  is  compensation  for  risk,  and  is  apt  to  be 
made  far  too  small  in  comparison  with  the  chances  of 
loss  on  the  principal. 

Interest,  from  the  standpoint  of  the  borrower,  is  the 


270  PROFITS. 

price  paid  for  the  control  of  industry.  Capital  gives  its 
possessors  the  right  to  direct  the  productive  forces  of 
society  if  they  will  take  the  speculative  risks  connected 
with  the  uncertainty  as  to  the  value  of  the  product.  When 
some  of  those  who  unite  in  an  investment  are  anxious  to 
do  this  and  others  are  not,  the  former  stand  ready  to  offer 
the  latter  a  price  for  such  rights  of  control.  Interest  from 
the  standpoint  of  the  lender  is  the  price  for  which  he  is 
ready  to  forego  the  chances  of  control  which,  under  the 
present  social  system,  the  ownership  of  unconsumed 
wealth  gives  him.     It  represents  commuted  profits. 

§  301.  The  rate  of  interest,  in  its  industrial  aspect,  is 
neither  more  nor  less  than  a  competitive  rate  of  commuta- 
tion. It  is  fixed  like  any  other  competitive  price,  by  the 
self-interest  of  individuals,  in  such  a  way  that  the  demand 
for  loans  becomes  equal  to  the  supply. 

Nearly  all  loans  are  made  with  the  immediate  or  ulti- 
mate purpose  of  investing  the  borrowed  capital  in  such  a 
way  as  to  enable  the  borrower  to  secure  a  profit — as  in 
undertaking  a  business  enterprise — or  to  avoid  an  expense 
— as  in  becoming  the  owner  of  a  home  which  will  save 
the  necessity  of  paying  rent.'     The  demand  for  produc- 

'  There  are  three  other  less  important  sources  of  demand  for  loans  which 
require  mention  at  this  point : 

(i)  A  few  people  desire  loans  for  the  pleasure  of  consumption  rather  than 
for  their  utility  in  production.  They  will  borrow  money  to-day  which  it 
may  be  ten  times  harder  to  repay  to-morrow,  because  abstinence  to-day 
seems  to  their  imprudent  minds  a  far  more  serious  matter  than  abstinence  to- 
morrow. The  demand  for  accommodation  of  this  kind  is  so  unintelligent 
that  its  amount  is  but  slightly  affected  by  the  rate  charged. 

(2)  A  somewhat  larger  number  of  people  desire  loans  as  a  means  of  meet- 
ing contracts  which  they  have  previously  made,  and  which  they  cannot 
otherwise  fulfil  without  selling  some  of  their  property  at  a  sacrifice.  These 
loans  are  sought  for  the  purpose  of  avoiding  a  loss  rather  than  of  making  a 
profit — if  the  two  things  can  be  said  to  be  distinguishable.  They  have 
special  importance  in  times  of  monetary  stringency.  The  demand  for  such 
loans  is  more  affected  by  changes  in  the  rate  of  interest  than  that  for  con- 
sumption loans,  but  less  so  than  that  for  industrial  loans. 

(3)  Nations  make  loans  for  war  purposes,  in  order  to  maintain  an  army  at 
the  expense  of  future  taxpayers  instead  of  present  oaes  (chapter  xiv.) 


THE  DEMAND   FOR  LOANS.  2/1 

tive  loans  of  this  kind  depends  almost  entirely  upon 
the  rate  charged.  If  a  man  has  intimate  knowledge  of 
the  details  of  a  business,  he  knows  when  to  borrow  and 
when  to  contract  his  borrowings.  His  demand  for  loans 
arises  from  the  fact  that  he  expects  a  profit  from  the  con- 
trol of  the  capital.  As  long  as  this  expected  profit  is 
greater  than  the  prevailing  rate  of  interest,  he  will  be  a 
borrower  rather  than  a  lender.  If  he  thinks  that  the 
profit  from  an  enterprise  will  be  seven  per  cent,  and  he 
can  borrow  additional  capital  at  five  per  cent,  he  will  be 
glad  to  do  so.  Of  course  he  knows  that  he  may  fail  to 
make  more  than  four  per  cent,  in  which  case  his  borrow- 
ing will  prove  to  have  involved  a  loss ;  but  he  also  knows 
that  there  is  a  chance  of  making  ten  per  cent,  in  which 
case  there  is  an  exceptional  gain.  If  he  has  confidence 
in  his  estimate  of  seven  per  cent  as  the  probable  rate  of 
profit  on  a  series  of  transactions,  he  will  not  hesitate  to 
borrow  at  five  per  cent,  or  even  at  six ;  believing  that  the 
losses  on  some  transactions  will  be  more  than  balanced 
by  the  extra  gains  in  others. 

As  the  rate  of  interest  becomes  higher  the  number  of 
men  who  are  ready  to  borrow  grows  less.  If  in  the  case 
just  assumed  the  rate  of  interest  had  been  seven  per 
cent  instead  of  five,  the  man  who  expected  the  profit 
to  be  seven  per  cent  would  have  no  inducement  to 
borrow ;  and  if  the  rate  rose  to  eight  per  cent  he  would 
become  a  lender  instead  of  a  borrower.  He  would  find  it 
to  his  advantage  to  commute  his  profits,  instead  of  taking 
his  chances  ;  to  accept  guarantees  instead  of  giving  them. 
A  considerable  part  of  the  supply  of  loanable  capital 
comes  from  business  men  who  are  so  conservative  in  their 
estimates  of  probable  profit  that  they  content  themselves 
with  the  certainty  of  a  moderate  rate  which  their  more 
sanguine  competitors  deem  inadequate.  We  may  say,  in 
a  rough  way,  that  the  rate  of  interest  in  any  business 
tends  to  a  point  where  the  demand  for  capital  on  the  part 
of  those  who   think   their   profit  will   exceed   that  rate 


272  PROFITS. 

equals  the  supply  furnished  by  those  who  think  that  it 
will  not.' 

§  302.  In  point  of  fact,  the  rate  is  a  little  lower  than 
this.  The  borrower  has  a  certain  amount  of  trouble  in 
the  management  of  capital,  from  which  the  lender  is  at 
least  partly  free  ;  and  this  freedom  from  trouble  makes 
the  lender  willing  to  commute  at  a  slightly  lower  rate 
than  he  would  otherwise  accept,  and  enables  the  borrower 
to  get  the  benefit  of  this  margin.  Moreover  there  is  a 
large  class  of  lenders  to  whom  a  sure  return  is  a  matter 
of  positive  advantage  independent  of  the  rate  charged. 
There  are  a  great  many  people  to  whom  the  certainty  of 
five  per  cent  is  worth  more  than  an  uncertain  profit  which 
will  probably  be  higher  but  which  may  turn  out  to  be 
much  lower.  The  positive  value  of  this  insurance  is  such 
as  to  make  the  supply  of  capital  equal  the  demand  at  a 
rate  lower  than  would  otherwise  be  fair  or  probable.  For 
the  offer  of  a  fixed  interest  rate  attracts  capital  from 
many  investors  with  whom  insurance  is  a  dominant  motive 
instead  of  an  incidental  one.  These  people  do  not  ask 
what  is  the  average  probable  profit  in  any  line,  but  what 
they  can  be  sure  of  getting  on  their  loans.  They  are  not 
prepared  to  make  active  investments  in  industrial  enter- 
prises if  they  can  possibly  help  it.  They  simply  stand 
ready  to  put  their  capital  at  the  disposal  of  the  borrower 
who  will  offer  them  the  best  terms  consistent  with  full 
security.  Banks,  and  particularly  savings  banks,  belong 
to  this  class ;  so  in  great  measure  do  life  insurance  com- 
panies ;  and  so  do  most  of  the  people  who  have  retired 
from  active  business  and  are  living  on  money  which  they 
have  saved. 

'  Some  of  the  receivers  of  interest,  where  the  contract  is  what  it  pretends 
to  be,  obtain  a  surplus  from  the  transaction  analogous  to  that  of  the  con- 
sumers or  laborers  (§  295).  They  would  be  willing  to  lend  capital  at  much 
lower  rates  than  they  actually  receive ;  but  the  large  demands  of  the  loan 
market,  and  the  unwillingness  of  other  possessors  of  capital  to  lend  it  at 
low  rates,  enable  them  to  get  a  larger  return  than  they  would  otherwise  exact. 


THE   SUPTLY   OF  LOANS.  2/3 

§  303-  ^^  thus  have  two  distinct  sources  of  supply  of 
loanable  capital.  A  part  comes  from  business  men  who 
might  be  borrowers  instead  of  lenders,  and  who  take  the 
latter  position  only  when  the  interest  rate  seems  too  high 
in  proportion  to  the  risk.  The  amount  of  capital  available 
from  this  source  is  directly  dependent  on  the  price  offered. 
Another  part  comes  from  people  who  could  not  take  an 
active  share  in  the  management  of  industry  ;  people  who 
lend  money  as  a  means  of  insuring  themselves  an  income 
and  who  accept  the  best  terms  which  they  can  get.  The 
amount  of  such  capital  does  not  vary  with  the  rate  offered 
— at  least  not  to  anything  like  the  degree  which  is  often 
assumed.  Observation  does  not  show  that  a  high  rate  of 
interest  has  very  much  effect  on  saving.  Some  of  the 
motives  to  save  are  even  stronger  when  the  rate  is  low 
than  when  it  is  high.  If  a  man  wishes  to  provide  himself 
with  an  income  of  $1,000  per  year  for  his  own  support 
and  that  of  his  family  when  he  becomes  unable  to  work, 
it  is  enough  for  him  to  save  $20,000  if  he  can  get  five  per 
cent  interest  ;  but  if  he  can  only  get  four  per  cent  he 
must  save  $25,000  in  order  to  secure  the  required  result. 
It  may  safely  be  said  of  the  general  fund  of  savings,  that 
the  rate  of  interest  adjusts  itself  to  the  amount,  rather 
than  the  amount  to  the  rate. 

§  304.  The  thing  which  is  offered  by  the  borrowers  in 
exchange  for  loanable  capital,  and  which  equalizes  the 
supply  and  demand  of  such  capital,  is  a  rate  of  income 
(§  5)-  The  interest  transaction  is  an  exchange  of  in- 
come for  capital.  The  rate  of  interest  is  the  amount  of 
income  per  year  which  the  owner  of  capital  deems  an 
adequate  consideration  to  induce  him  to  part  with  the 
capital.  Wealth  measured  in  one  way  is  exchanged  for 
wealth  measured  in  another.  If  interest  stands  at  five 
per  cent  it  means  that  in  the  judgment  of  the  mercan- 
tile community,  five  dollars  a  year  is  worth  a  hundred 
dollars  out  and  out.     This  judgment  or  market  valuation 


274  PROFITS. 

implies  that  the  amounts  of  capital  which  people  are  will- 
ing to  convert  into  income  at  that  rate  correspond  to  the 
amounts  of  income  which  people  are  willing  to  convert 
into  capital.'  If  the  rate  of  interest  is  less  than  five  per 
cent,  there  will  be  more  people  who  offer  income  for 
the  sake  of  capital,  /.  e.,  in  common  parlance,  more  bor- 
rowers than  lenders.  If  the  rate  is  more  than  five  per 
cent  there  will  be  an  excess  of  people  who  offer  capital 
for  the  sake  of  income,  i.  e.,  more  lenders  than  borrowers. 
§  305.  The  general  fund  of  loanable  capital  owned  by 
people  who  desire  neither  risk  nor  control  tends  to 
equalize  interest  rates  in  different  lines.  There  are  a 
number  of  people  who  invest  part  of  their  money  in 
railroad  bonds,  and  part  in  real  estate  mortgages.  If 
railroad  interest  rates  fall,  while  farm  rates  remain  un- 

'  The  valuation  which  constitutes  the  basis  of  the  interest  rate  may  be  ex- 
pressed either  in  the  form  of  a  relation  between  capital  and  income,  as  in 
the  text,  or  in  the  form  of  a  relation  between  present  and  future  goods,  as  is 
done  by  Boehm-Bawerk.  It  makes  little  difference  whether  we  say  that  one 
hundred  dollars  of  capital  commands  an  income  of  five  dollars  a  year,  or  that 
one  hundred  and  five  dollars  due  a  year  hence  is  worth  one  hundred  dollars 
to-day.  The  former  statement  regards  the  transaction  as  an  investment,  the 
latter  as  a  discount.  The  distinction  between  them  is  one  of  form,  not  of 
substance. 

There  is  a  different  view  of  the  cause  of  interest  which  is  held  by  so  many 
able  writers  of  the  Austrian  school  (Menger,  Wieser,  Clark),  that  it  demands 
careful  notice.  According  to  this  view,  the  price  paid  for  an  article,  which 
represents  its  marginal  utility  to  the  consumer,  is  distributed  among 
laborers  and  capitalists  on  the  basis  of  the  marginal  utility  of  the  labor  and 
capital  which  have  contributed  to  its  production.  If  the  utility  of  capital, 
as  represented  by  its  efficiency  in  producing  the  article,  is  higher  than  the 
interest  charged  for  its  use,  more  capital  will  be  employed,  and  longer  time 
allowed  to  elapse  between  the  rendering  of  labor  and  the  realization  of  the 
product.  If  the  utility  of  labor  in  producing  additional  supplies  of  the 
article  is  greater  than  the  wages  charged,  additional  labor  will  be  em- 
ployed. These  writers  conceive  of  capital  and  labor  as  administered  in 
successive  doses.  As  the  amount  increases,  the  marginal  utility  of  the  doses 
will  diminish.  Competition  will  compel  all  capitalists  to  accept  rates  of 
interest,  and  all  laborers  to  accept  rates  of  wages,  based  upon  the  produc- 
tivity of  the  last   dose,  which  gives  an  "imputed"  value  to  the  whole 


ADJUSTMENT  OF  INTEREST  RATES.  275 

changed,  some  of  these  people  will  direct  their  new 
investments  to  farms  instead  of  railroads  ;  increasing  the 
supply  of  farm  loans  and  diminishing  that  of  railroad 
loans.  If  this  process  were  completely  carried  out,  we 
should  have  an  equalization  of  the  rates  of  interest  in 
different  lines,  and  the  establishment  of  one  general  rate 
of  interest  for  capital  as  a  whole. 

§  306.  This  equalizing  process  is  never  fully  accom- 
plished, partly  for  lack  of  time,  but  chiefly  for  lack  of 
knowledge  on  the  part  of  investors.  It  takes  months, 
and  generally  years,  for  property  owners  as  a  body  to 
find  out  where  profits  really  are  highest  and  transfer 
their  investments  of  capital  in  amounts  sufficient  to  reduce 
the  rate  of  profit  in  those  lines  to  the  general  level. 
When  the  public  has  found  out  where  the  opportunity 

supply  both  of  capital  and  of  labor.  This  process  adjusts  the  demand  and 
price  of  labor  and  capital  in  such  a  way  that  the  marginal  utility  of  a  dollar 
spent  for  waiting  (interest)  is  equal  to  the  marginal  utility  of  a  dollar  spent 
for  labor  (wages). 

The  obvious  difficulty  in  this  theory  lies  in  the  fact  that  these  adjustments 
are  apt  to  be  disturbed  by  the  mistakes  of  speculators  (§  324,  note).  But 
there  is  a  more  fundamental  objection  to  the  whole  analysis  from  the  fact 
that  it  involves  reasoning  in  a  circle.  If  at  the  beginning  of  a  productive 
process  we  decide  upon  using  an  increment  of  capital  instead  of  an  incre- 
ment of  labor,  it  necessarily  means  that  we  wait  longer  for  our  product. 
We  cannot  therefore  tell  when  the  marginal prodtutivity  of  labor  and  capital 
is  equal  unless  we  know  the  relative  value  of  products  at  two  different 
periods  J  i.  e.,  the  rate  of  interest.  If  we  do  not  stand  at  the  beginning  of  a 
period  of  production,  but  decide  to  avail  ourselves  of  the  results  of  past  labor 
instead  of  the  services  of  present  labor — which  is  the  case  contemplated  in  the 
more  popular  expositions  of  the  theory  of  imputation — we  do  not  touch  the 
question  of  interest  at  all.  We  pay  a  price  for  the  results  of  past  labor 
directly  to  the  owners  of  the  property,  instead  of  giving  money  to  our 
I  iborers  to  buy  those  results  for  themselves.  A  manufacturer  uses  his  capi- 
t.-l  to  buy  coal,  which  represents  the  results  of  past  labor  ;  he  pays  wages 
v.'hich  enable  his  employees  to  buy  flour  which  also  represents  the  results  of 
[latt  labor.     There  is  no  more  waiting  in  the  one  case  than  in  the  other. 

It  may  be  added  that  if  we  look  at  the  matter  from  any  but  the  narrowest 
point  of  view,  all  "  doses  "  of  capital  are  administered  in  the  form  of 
wages. 


276  PROFITS. 

for  large  rates  of  interest  has  really  lain,  the  conditions 
of  business  which  gave  that  opportunity  have  generally 
passed  away.  Instead  of  bringing  down  an  unduly  high 
rate  of  interest,  the  luckless  investors  will  find  themselves 
competing  in  an  over-filled  industry,  where  the  chance 
of  profit  hardly  covers  the  risk  to  any  of  the  parties 
concerned. 

Even  without  such  over-competition,  the  uninstructed 
capitalists  who  seek  high  rates  of  interest  are  apt  to  go 
into  the  wrong  places.  They  go  wliQre  interest  is  appar- 
ently highest,  rather  than  where  it  is  really  highest. 
They  do  not  distinguish  between  high  rates  which  offer 
real  chances  of  profit  on  good  security,  and  those  which 
conceal  a  large  danger  of  loss.  Nor  is  this  at  all  surpris- 
ing. In  every  commercial  and  industrial  loan  the  element 
of  risk  is  present  to  a  greater  or  less  degree.  It  requires 
special  knowledge  of  the  conditions  of  any  particular 
business  to  know  whether  that  business  gives  special 
safety  or  special  hazard.  Where  the  rate  of  interest  on 
what  appears  to  be  good  security  is  a  little  higher  than 
that  which  prevails  in  other  lines  or  other  localities,  we  gen- 
erally find  that  there  are  some  hidden  chances  of  loss  which 
account  for  the  difference.  It  is  these  chances  of  loss 
which  prevent  the  capitalists  who  have  direct  knowledge 
of  the  business  from  extending  their  investments  on  terms 
which  are  apparently  so  favorable.  If,  under  these  con- 
ditions, the  uninstructed  capitalist,  who  has  not  this 
special  knowledge,  rushes  in  to  take  advantage  of  the 
high  rate,  he  is  apt  to  lose  a  considerable  proportion  of 
the  principal  which  he  has  risked.  Any  movement  of 
capital  to  these  lines  results  in  lowering  the  rate  of  in- 
terest where  the  margin  of  risk  is  high,  and  where  the 
true  interest  or  guaranteed  profit,  over  and  above  such 
special  risks,  was  perhaps  unduly  low  from  the  beginning. 

If  a  man  possesses  unusual  sources  of  knowledge,  he 
can  with  a  fair  degree  of  safety  undertake  to  secure  rates 


MONEY  SUPPLY  AND  INTEREST.  277 

of  interest  higher  than  those  quoted  in  the  open  market. 
But  in  the  absence  of  such  special  knowledge  the  chances 
are  that  the  equalizing  process  will  work  in  the  wrong 
directions  instead  of  in  the  right  ones,  and  that  the  in- 
vestor who  tries  to  get  the  benefit  of  large  returns  of 
interest  will  find  this  benefit  more  than  counterbalanced 
by  losses  on  his  principal. 

§  307.  Making  proper  allowance  for  the  slowness  or 
imperfection  of  these  adjustments,  we  may  fairly  say  that 
there  is  a  general  rate  of  interest  at  which  the  demand 
for  capital  equals  the  supply. 

This  general  rate  of  interest  may  be  influenced  in  three 
ways :  by  changes  in  the  supply  of  money,  in  the  supply 
of  products,  and  in  the  degree  of  commercial  security. 
The  effects  of  the  two  first  are  trifling  in  importance  as 
compared  with  the  last. 

§  308.  We  have  already  seen  (§253)  the  fatuity  of  most  of 
the  attempts  to  lower  the  rate  of  interest  by  increasing  the 
supply  of  money.  Changes  in  the  volume  of  the  currency 
are  quickly  followed  by  corresponding  changes  in  price. 
The  man  who  desires  to  use  a  certain  amount  of  food  or 
machinery  and  to  control  a  certain  amount  of  labor  must 
borrow  a  proportionally  larger  sum  of  money  in  order  to 
get  the  products  and  services  required.  The  demand  for 
capital  increases  side  by  side  with  the  supply  ;  and  the 
uncertainty  which  loose  currency  legislation  creates  with 
regard  to  the  future,  actually  tends  to  force  the  rate  of 
interest  upward. 

The  one  exception  to  this  rule  which  is  important 
enough  to  deserve  notice  arises  when  issues  of  money  are 
made  in  such  a  form  as  to  relieve  a  temporary  stringency 
in  the  money  market.  In  such  a  case  the  public  is  seek- 
ing for  means  of  payment  rather  than  for  means  of  in- 
vestment, and  an  unexpected  supply  of  such  means  of 
payment  may  break  what  is  virtually  a  corner  (§  175)  in 
the  stock  of  available  money.     But  even  in  this  case  it  is 


2/8  PROFITS. 

necessary  that  the  inflated  supply  of  money  be  quickly 
retired,  in  order  to  prevent  the  subsequent  rise  in  interest 
due  to  the  speculation  and  insecurity  which  such  excess 
of  currency  engenders. 

§  309.  The  idea  that  the  rate  of  interest  can  be  lowered 
by  increasing  the  supply  of  products  involves  less  practi- 
cal danger,  because  it  is  very  hard  for  any  mischief-maker 
to  put  it  into  effect ;  but  as  a  theoretical  fallacy  it  is  even 
more  subtle  and  dangerous  than  the  one  just  exposed. 
When  the  student  of  economics  has  mastered  the  idea 
that  interest  is  paid  for  capital  and  not  for  money,  he 
infers  that  an  increase  in  the  supply  of  capital  will  result 
in  diminishing  the  rate  paid  for  the  use  of  such  capital. 
So  it  undoubtedly  will.  If  there  are  twice  as  many 
machines  in  existence,  the  rental  value  of  each  machine 
will  fall.  But  the  rate  of  interest  will  not  necessarily  be 
affected  thereby.  The  price  of  each  machine  will  fall 
nearly  as  fast,  and  may  fall  quite  as  fast,  as  its  rental 
value.  Interest  on  a  machine  is  expressed  by  the  ratio 
between  the  rental  and  the  price.  The  rate  of  interest 
will  therefore  suffer  little  or  no  change  from  an  increased 
supply  of  machinery.  A  large  part  of  the  causes  which 
are  used  to  explain  when  interest  will  be  low  really  show 
when  machinery  will  be  cheap,  and  nothing  more. 

§  310.  The  case  is  a  little  less  clear  when  we  come  to  in- 
vestigate the  effect  of  an  increased  supply  of  food  instead 
of  an  increased  supply  of  machines.  An  increase  of  food 
enables  the  community  to  wait  a  longer  time  for  the  vari- 
ous products  of  its  labor,  and  to  get  the  benefit  of  improve- 
ments which  involve  this  long  period  of  waiting.  It  is 
argued  by  some  writers  that  a  fall  in  the  rate  of  interest 
necessarily  follows  such  a  lengthening  of  time  in  produc- 
tion. But  it  is  doubtful  whether  this  result  takes  place 
in  practice.  An  increase  in  food  supply  is  so  apt  to  lead 
to  increased  consumption  on  the  part  of  the  laborers  that 
the  surplus  will  be  utilized  in  a  far  different  way  from  that 


FOOD   SUPPLY  AND  INTEREST. 


279 


contemplated  by  this  theory — not  by  a  lengthening  of 
production  time,  but  by  a  shortening  of  consumption  time. 
Under  these  circumstances  it  seems  a  mistake  to  deduce 
what  the  rate  of  interest  will  be  if  the  habits  of  the 
laboring  class  remain  unchanged,  when  in  fact  the  habits 
of  the  laboring  classes  adjust  themselves  to  the  increased 
supply  of  products  faster  than  the  rate  of  interest  does.' 

The  chief  practical  effect  of  abundance  of  capital  upon 
the  rate  of  interest  is  a  psychological  one.  If  goods  are 
scarce  in  proportion  to  people's  bodily  necessities,  the 
public  often  sets  a  high  value  on  present  consumption 
and  makes  relatively  little  account  of  the  future.  An 
increasing  abundance  of  consumable  products,  by  dimin- 
ishing the  pressure  of  immediate  necessity,  gives  larger 
room  for  intelligent  classification  of  risks  and  for  accept- 
ing future  enjoyments  instead  of  present  ones,  on  terms 
more  nearly  commensurate  to  the  actual  risk  which  arises 
from  deferring  the  enjoyment  in  question. 

§311.  The  prevailing  rate  of  interest  is  far  more  affected 
by  the  degree  of  security  than  by  the  volume  of  money  or 
of  products.  While  people  may  not  always  judge  accu- 
rately of  the  security  in  any  particular  case,  there  is  no 
doubt  that  interest  in  general  is  low  where  property  is 
safe  and  high  where  property  is  uncertain,  apart  from  the 
conditions  which  prevail  in  any  particular  business.     This 

'  A  scarcity  of  food  lessens  the  profitable  use  of  machinery,  but  not 
through  the  agency  of  the  rate  of  interest.  If  there  is  only  food  enough  to 
last  a  year,  and  a  capitalist  diverts  laborers  from  the  production  of  food  and 
other  articles  of  immediate  use  to  employments  whose  return  is  more  remote, 
he  finds  at  the  end  of  a  year  that  the  supply  of  food  and  other  consumable 
products  is  scanty.  The  men  who  have  produced  food  find  their  private 
income  increased  by  this  scarcity ;  those  who  have  invested  capital  in 
machines  find  their  possible  profits  diminished  because  of  the  increased 
expense  of  maintenance  of  themselves  and  their  laborers  during  the  period 
of  waiting. 

Scarcity  of  food  and  high  rates  of  interest  both  have  the  same  effect  in 
restricting  the  use  of  machinery ;  but  this  does  not  prove  that  scarcity  of 
food  in  itself  causes  a  high  rate  of  interest. 


28o  PROFITS. 

is  partly  because  personal  security  promotes  accumulation 
of  products  (chapter  ii),  but  chiefly  because  an  assured 
future  enjoyment  is  far  more  valuable  than  a  doubtful 
one. 

The  best  guarantee  of  security  is  given  by  the  personal 
character  of  the  capitalists  in  a  nation  ;  but  the  clearest 
evidence  of  such  security  is  generally  to  be  found  in  con- 
servative government.  If  law  is  so  administered  as  to 
make  property  rights  precarious,  the  value  of  a  future 
return  will  necessarily  be  low.  If  it  is  so  administered  as 
to  make  them  stable,  the  value  of  future  goods  will  more 
nearly  correspond  to  that  of  present  ones.  In  the  former 
case  the  rate  of  interest  will  be  high ;  in  the  latter  case  it 
will  be  low.' 

§  312.     It  must  not  be  supposed  that  a  low  rate  of  in- 

'  Security  affects  the  rate  of  interest  in  two  ways,  which  must  be  carefully 
distinguished  from  one  another. 

The  conscious  attempt  to  provide  against  particular  risks  causes  differences 
in  the  nominal  rate  of  interest.  In  uncivilized  countries  a  large  part  of  the 
interest  payments  are  of  this  kind.  The  bottomry  loan  in  old  times  often 
called  for  twenty  per  cent  interest  because  of  the  chance  that  the  ships 
which  furnished  the  security  would  be  wrecked.  But  as  civilization  ad- 
vances these  risks  come  to  be  separated  in  the  mind  of  the  investors  from  a 
residual  sum  which  they  can  obtain  on  ivhat  they  consider  absolutely  good 
security.  This  rate  is  not  looked  at  by  the  individual  as  a  payment  for 
risk.  Yet  its  height  is  probably  in  large  measure  a  result  of  past  experience 
as  to  losses  ;  and  this  experience  is  a  most  potent  factor  in  determin- 
ing the  relative  value  which  people  place  upon  present  and  future  goods 
even  when  they  suppose  those  future  goods  to  be  certain.  If  investors  have 
been  free  from  unforeseen  losses  in  the  immediate  past,  there  is  at  once  a 
greater  quantity  of  old  capital  in  the  hands  of  people  who  are  ready  to  offer 
its  control  to  others,  and  a  greater  habitual  readiness  to  accept  promises  of 
moderate  income  rates  as  an  adequate  consideration  for  such  control.  If  on 
the  other  hand  people  have  suffered  considerable  losses  of  property  which 
they  have  entrusted  to  others,  there  is  at  once  a  smaller  supply  of  capital  iu 
the  hands  of  people  who  are  ready  to  part  with  its  control,  and  a  hesitation 
to  accept  promises  of  moderate  income  as  an  adequate  consideration  for 
such  control,  even  when  there  appears  to  be  no  tangible  risk  in  the  particu- 
lar case  involved.  Thus  the  relative  valuation  placed  upon  present  capital 
and  future  income  is  unconsciously  influenced  by  the  past  experience  of  the 
community. 


DIFFERENCES  IN  RISK.  '  28 1 

terest,  due  to  increased  security,  represents  an  unmixed 
good  for  society.  Risk  is  an  incident  of  progress.  As 
long  as  the  human  mind  is  not  endowed  with  prophetic 
foresight,  great  security  may  be  obtainable  only  at  the 
price  of  general  stagnation.  So  far  as  insecurity  results 
from  activity  in  industrial  enterprise  on  the  part  of  the 
capitalists  of  a  nation,  rather  than  from  lax  enforcement  of 
the  laws  protecting  vested  rights,  it  is  a  good  thing.  If 
a  low  rate  of  interest  means  that  people  do  not  tamper  with 
laws  it  is  good  ;  if  it  means  that  they  do  not  experiment 
with  business  methods  it  is  bad.  In  the  latter  case  any 
saving  which  results  from  a  low  rate  of  interest  is  from  the 
public  standpoint  more  than  nullified  by  the  failure  to 
utilize  new  processes  and  new  ideas  as  fast  as  they  are 
developed. 

§313,  The  tendency  of  profits  and  interest  to  fall  as 
a  nation  advances  has  been  much  overestimated.  The 
high  rate  of  profit  in  new  countries  is  apparent  rather  than 
real.  A  new  country  offers  more  fields  of  exceptional 
profit  than  an  old  one,  but  it  also  involves  more  dangers 
of  exceptional  losses.  The  statistics  of  railroads  in  differ- 
ent parts  of  the  United  States,  show  that  the  ratio  of  in- 
come to  the  total  capital  invested  is  much  higher  in  the 
older  parts  of  the  country,  and  lower  in  those  which 
are  more  newly  settled.  Part  of  this  difference  is  doubt- 
less due  to  the  fictitious  capitalization  of  railroads  in  the 
West,  where  the  real  percentage  of  profit  to  capital  inves- 
ted is  greater  than  the  apparent  percentage.  Yet  after 
making  all  due  allowance  under  this  head  there  remains  a 
balance  in  favor  of  investments  in  the  East.  This  balance 
of  profit  is  made  yet  more  conspicuous  if  we  take  into 
account  the  generally  appreciating  value  of  railroad  secu- 
rities in  New  England  or  the  Middle  States,  and  contrast 
it  with  the  great  depreciation  which  has  affected  so  many 
companies  in  the  South  and  West.  If,  instead  of  confin- 
ing our  investigation  to  one  country,  we  compare  the  rail- 


282  PROFITS. 

roads  of  Europe  with  those  of  the  United  States,  we  shall 
find  that  the  European  Hnes,  which  at  first  promised  less 
apparent  profit,  have  on  the  average  proved  more  remun- 
erative to  the  investors  than  have  those  of  the  United 
States. 

The  popular  misunderstanding  about  profits  in  new 
countries  is  due  to  two  causes.  In  the  first  place,  the 
expectation  of  profit  on  the  part  of  men  who  venture 
their  capital  in  a  new  country  is  generally  exaggerated. 
Public  opinion  is  influenced  by  the  glowing  reports  of 
profits  that  are  going  to  be  realized,  and  does  not  stop  to 
inquire  how  far  these  expectations  are  warranted  by  actual 
facts.  In  the  second  place,  the  public  sees  the  instances 
of  exceptional  profit,  which  stand  out  clearly  because  of 
their  success,  and  does  not  see  those  failures  which  have 
sunk  out  of  sight  because  they  were  unsuccessful. 

§  314.  While  profits  do  not  perhaps  decline  as  a  nation 
advances,  but  simply  become  surer  and  less  speculative, 
the  rate  of  interest  undoubtedly  tends  to  fall ;  but  this  fall 
is  not  so  marked  as  most  people  suppose.  Many  cases 
of  high  nominal  interest  in  a  new  country  result  from  con- 
tracts that  are  more  or  less  fraudulent  in  their  character. 
In  an  undeveloped  region  there  are  always  a  number  of 
speculators  who  borrow  money  without  giving  adequate 
security,  obtaining  such  money  by  the  promise  of  a  rate 
of  interest  which  leads  investors  to  close  their  eyes  to  the 
defective  character  of  the  security  offered.  It  is  common 
to  speak  of  the  high  rates  of  interest  received  in  such 
cases  as  constituting  insurance  against  risk.  But  the 
amounts  thus  received  in  the  form  of  interest  represent  so 
small  a  fraction  of  the  losses  on  the  principal  that  the  term 
insurance  is  an  arrant  misnomer.  Such  contracts  never- 
theless give  rise  to  an  impression  that  the  actual  market 
rate  on  good  security  is  higher  than  is  really  the  case. 

At  a  time  when  interest  rates  in  one  of  our  leading 
northwestern  states  were  quoted  in  the  eastern  market  at 


NEW  AND   OLD   COMMUNITIES.  283 

seven  per  cent  on  first-class  security,  the  writer  took  pains 
to  inquire  of  conservative  local  bankers  what  were  the 
actual  rates  which  persons  in  that  section  who  had  money 
to  lend  felt  that  they  could  command.  He  found  that 
such  loans  ran  at  six  per  cent  and  less.  The  differ- 
ence of  one  per  cent  was  offered  the  eastern  investor  as 
an  insurance  against  risk.  How  miserably  inadequate  it 
was  for  the  purpose  was  seen  in  the  collapse  two  or 
three  years  later  of  the  security  for  a  large  number  of 
these  seven  per  cent  loans. 

§315.  After  making  proper  allowance  for  these  causes 
which  affect  the  apparent  or  nominal  rate  of  interest  in  a 
new  country,  there  still  remains  a  slight  difference  in  the 
real  rate.     This  may  be  explained  as  follows  : 

1.  In  most  new  communities  there  is  an  insecurity  of 
tenure  and  a  chance  for  adverse  legislation  regulating 
conditions  of  payment,  which  make  future  rights  less 
valuable  than  they  are  in  more  conservative  countries, 
where  the  probability  of  change  is  less. 

2.  The  high  rate  of  apparent  or  false  interest  just  de- 
scribed attracts  into  illegitimate  investments  a  certain  part 
of  the  supply  of  the  capital  which  would  otherwise  be 
used  in  legitimate  ones  and  prevents  the  rate  of  true 
interest  from  being  lowered  to  the  point  which  it  should 
normally  reach.  The  point  of  equilibrium  of  the  supply 
and  demand  of  capital  is  forced  upward  by  the  action  of 
speculators  who  are  not  really  in  a  position  to  offer  inter- 
est, but  who  are  enabled  by  the  blindness  of  certain 
sections  of  the  investing  public  to  compete  in  the  market 
for  industrial  loans. 

3.  In  a  new  country  a  larger  proportion  of  people  are 
anxious  to  manage  their  own  business,  instead  of  leaving 
it  to  others.  If  a  given  amount  of  capital  is  in  the  field 
seeking  profits,  the  height  of  the  interest  rate  will  depend 
upon  the  relative  numbers  of  those  who  desire  control  and 
of  those  who  are  willing  to  abandon  such  control  for  the 


284  PROFITS. 

sake  of  a  fixed  return.  Where  nearly  everj'body  wishes 
to  conduct  his  own  business,  the  interest  rate  will  alrnost 
necessarily  be  higher  than  where  most  people  are  willing 
to  leave  the  conduct  of  business  in  the  hands  of  others. 
In  the  early  history  of  New  England,  rates  of  interest 
were  higher  than  they  are  now,  not  because  property  was 
less  secure  nor  because  capital  was  scarce,  but  because 
almost  every  man  stood  ready  to  manage  his  own  capital, 
and  required  considerable  inducements  in  order  to  be  will- 
ing to  entrust  it  to  others. 

§  316.  The  process  which  tends  to  equalize  the  rates  of 
interest  in  different  lines,  operates  also,  but  in  a  less 
degree,  to  equalize  the  rates  of  profit. 

If  interest  goes  down  while  profit  remains  station- 
ary, there  is  a  margin  of  advantage  to  the  borrowers, 
which  makes  each  of  them  anxious  to  use  more  capital  in 
his  business.  So  far  as  they  do  this,  they  will  increase  the 
supply  of  products,  which  necessarily  puts  prices  down, 
and  will  increase  the  demand  for  labor,  which  tends  to 
force  wages  up.  This  process  will  go  on  until  the  rate  of 
profit  adjusts  itself  to  the  rate  of  interest ;  that  is,  until 
the  difference  between  the  two  is  only  sufficient  to  pay 
the  employer  a  fair  compensation  for  his  time  and  trouble 
— such  as  he  could  earn  if  working  for  another  instead  of 
for  himself. 

§  317.  But  there  are  certain  causes  which  make  this 
adjustment  very  incomplete.  They  have  already  been 
mentioned  in  some  detail  in  connection  with  normal  price 
(§  loi.)  Looking  at  the  matter  from  the  standpoint  of 
the  producer  instead  of  the  consumer,  we  may  •  divide 
them  into  two  groups  : 

1.  Where  all  the  business  men  in  an  industry  combine 
to  prevent  the  increase  of  investment  and  production. 

2.  Where  they  act  independently  and  compete  with  one 
another,  but  where  some  have  advantages,  either  of  method 
or  location,  which  others  do  not  possess. 


DIFFERENTIAL   GAINS.  285 

Both  of  these  are  commonly  called  cases  of  monopoly  ; 
but  the  term  applies  much  more  properly  to  the  first 
class  than  to  the  second.  The  superiority  which  one 
man  has  over  his  competitor  when  the  two  are  actually 
engaged  in  bidding  against  one  another  for  the  public 
favor  may  better  be  called  a  differential  advantage  than  a 
monopoly. 

§  318.  The  exceptional  profits  of  a  true  monopoly  are 
generally  transient  in  their  character.  If  they  are  due  to 
a  patent,  which  is  the  commonest  case,  they  end  with  the 
expiration  of  the  patent  right  ;  frequently  even  earlier 
than  this,  on  account  of  the  invention  of  a  rival  process. 
If  they  are  due  to  closeness  of  organization  or  any  of  the 
other  causes  described  at  length  in  chapter  vi,  they  may 
last  longer  ;  yet  even  in  these  cases  they  are  apt  to  be  re- 
duced either  by  legislation,  by  fear  of  new  competition,  or 
even  by  the  pressure  of  public  opinion.  The  number  of 
monopolies  which  might  have  made  exorbitant  profits  for 
a  term  of  years  looks  very  large  ;  the  number  that  have 
actually  done  so  is  surprisingly  small. 

§319.  Differential  gains  are  quite  another  matter.  They 
generally  result  from  causes  precisely  opposite  to  those 
which  produce  true  monopolies.  A  true  monopoly  tends 
to  arise  when  a  large  concern  can  increase  its  output  with- 
out corresponding  increase  in  expense,  so  that  it  can  sup- 
ply the  whole  public  and  drive  smaller  or  weaker  concerns 
out  of  the  market.  This  case  is  often  exemplified  when  a 
large  factory  competes  with  a  number  of  smaller  ones. 
But  when  a  large  farm  competes  with  a  number  of  smaller 
ones,  the  case  is  quite  different.  The  large  farmer  prob- 
ably has  certain  advantages  due  to  the  scale  on  which  he 
conducts  his  operations.  But  the  amount  of  product  on 
which  he  can  realize  this  economy  is  limited  in  quantity. 
A  double  application  of  labor  and  capital  will  not  double 
his  output.  He  cannot  drive  his  smaller  competitors  out 
of  business,  because  the  attempt  to  supply  a  large  part  of 


286  PROFITS. 

the  market  from  one  farm  will  result  in  loss  instead  of 
gain.  Such  an  industry  is  said  to  be  subject  to  the  law 
of  the  diminishing  return.  The  two  chief  causes  of  dimin- 
ishing returns  are  the  limited  fertility  or  capacity  of  land, 
and  the  limited  power  of  human  brains.  No  land  can 
produce  unlimited  quantities  of  product ;  no  brain  can 
direct  unlimited  numbers  of  men.  If  the  demand  for  the 
products  of  any  industry  is  too  large  to  be  met  by  a 
single  organized  source  of  supply,  however  great  its  nat- 
ural advantages,  we  shall  be  likely  to  see  a  system  of 
differential  gains,  due  to  the  independent  competition  of 
men  who  make  goods  for  the  same  market  at  different 
expense. 

§  320.  Where  these  differential  gains  are  due  to  personal 
ability,  they  are  almost  always  transient  in  their  charac- 
ter, and  are  known  as  net  profits.  Where  they  are  due  to 
advantages  of  location,  they  are  apt  to  be  more  permanent, 
and  are  then  known  as  economic  rent.  We  may  define  rent 
in  its  technical  or  economic  sense,  as  zxiy  permanent  excess 
of  the  rate  of  profit  over  the  rate  of  interest.'  Economic 
rent  is  chiefly  due  to  foresight  in  investment ;  net  profit,  to 
skill  in  management.*     But  the  work  of  separating  the 

'  Some  writers  attempt  to  explain  all  profits,  including  interest  itself,  as 
arising  from  differential  gain.  In  this  view,  which  has  been  most  ably  pre- 
sented by  Ricca-Salerno,  interest  represents  an  advantage  enjoyed  by  the 
owners  of  commodities  which  have  become  ready  at  so  early  a  period  that 
they  can  apply  labor  under  more  favorable  conditions  of  time  than  some  of 
their  competitors  can  command  ;  in  precisely  the  same  way  that  rent  repre- 
sents a  power  of  applying  labor  under  exceptionally  favorable  conditions  of 
place.  If  we  could  ignore  the  functions  and  the  mistakes  of  the  speculator 
(§  324,  «^^^)*this  would  apparently  be  a  sound  position.  But  as  matters 
stand  there  is  a  radical  difference  between  rent,  which  is  a  varying  actual 
advantage  possessed  by  the  owners  of  real  estate,  and  interest,  which  repre- 
sents a,  fixed  X2ii&  of  commutation  oi  possible  but  uncertain  advantage. 

*  We  can  in  many  cases  distinguish  profits  from  rent  by  finding  what  the 
plant  will  sell  for.  Excess  of  selling  price  over  cost  is  capitalized  rent. 
Excess  of  actual  return  from  the  property  over  interest  on  its  price  represents 
profit.  Thus  if  $25,000  represents  the  amount  of  capital  which  has  been 
used  in  improving  a  piece  of  real  estate,  $30,000  its  price  in  the  market, 


ECONOMIC  RENT.  28/ 

two,  even  in  theory,  is  very  difficult,  because  we  can  never 
tell  which  differential  advantages  are  permanent  and  which 
are  transient. 

§  321.  The  "  economic  "  or  "  Ricardian  '  "  sense  of  the 
word  rent  must  not  be  confounded  with  its  ordinary  com- 
mercial sense.  Commercial  rent  represents  a  price  paid 
for  the  use  of  land  and  improvements.  A  large  part  of  it 
is  interest  rather  than  rent.  If  we  deduct  the  interest  on 
improvements  from  the  commercial  rent,  the  remainder 
is  economic  rent.  This  is  sometimes  known  as  ground 
rent ;  and,  if  contracts  for  the  rent  of  land  were  renewed 
every  year,  ground  rent  and  economic  rent  would  be  sub- 
stantially the  same.  But  since  in  practice  ground  rent  is 
habitually  fixed  for  a  very  long  term  of  years,  the  actual 
divergence  between  the  ground  rent  paid  and  the  eco- 
nomic rent  computed  on  a  theoretical  basis  is  apt  to  be 
very  large. 

It  is  in  some  respects  unfortunate  that  the  term  "  rent  " 
should  have  been  chosen  to  designate  these  permanent 
differential  gains.  Investigators  are  apt  to  identify  them 
much  more  closely  with  actual  rents  than  the  facts  of  the 
case  warrant.  Thus  Shearman,  in  a  recent  book  on 
"  Natural  Taxation,"  treats  most  of  the  rent  of  agricultural 
lands  in  England  as  if  it  were  "economic"  rent;  whereas, 
in  fact,  the  amount  of  capital  which  the  landlords  have 
invested  in  English  farms  is  enormous.  If  interest  on  the 
capital  thus  invested  for  agricultural  improvements  had 
been  deducted,  as  it  ought  to  be,  the  conclusions  which 
Shearman  draws  from  his  figures  would  have  been  entirely 
reversed. 

and  $2,000  a  year  its  gross  profit  to  the  owner,  the  current  rate  of  interest 
being  five  per  cent,  we  shall  have  this  $2,000  made  up  of 
$1,250  economic  interest 
250         "         rent 
500         "  profit. 

'  The  theory  of  differential  gain  was  first  clearly  formulated  by  David 
Ricardo  in  his  Principles  of  Political  Economy  and  Taxation. 


288  PROFITS, 

§  322.  Economic  rent  and  net  profit  are  like  the  pro- 
ducers' and  consumers'  surplus  described  at  the  beginning 
of  the  chapter  in  being  differential  gains — gains  which  are 
due  to  a  difference  between  the  conditions  of  the  stronger 
and  the  weaker  competitors.  They  are  unlike  them,  first, 
in  being  habitually  measured  in  money  and  therefore 
more  observable ;  second,  in  being  offset  by  differential 
losses  which,  in  some  instances,  more  than  neutralize  the 
gains.  The  number  of  investments  of  fixed  capital  that 
have  more  than  paid  interest  is  perhaps  balanced  by  the 
number  of  those  that  have  failed  to  pay  interest.  While 
there  are  many  farms  that  are  worth  more  than  the  capital 
invested  in  them,  there  are  also  many  which  are  worth  less. 
In  times  of  advancing  prices  the  gains  are  more  con- 
spicuous than  the  losses.  In  times  of  commercial  depres- 
sion the  case  is  reversed. 

The  existence  and  persistence  of  this  negative  rent 
(and  of  the  corresponding  losses  or  negative  profits  in 
manufacturing  industry)  go  far  to  furnish  the  justification 
for  the  present  industrial  system.  If  it  were  true,  as 
George  alleges,  that  rent  is  simply  an  unearned  increment, 
an  appropriation  of  a  part  of  the  public  product,  then 
there  would  be  neither  wisdom  nor  equity  in  leaving  land 
under  private  ownership.  If  it  were  true,  as  Marx  claims, 
that  profits  represent  a  similar  unearned  increment,  the 
same  conclusion  would  follow  with  regard  to  capital.  But 
in  point  of  fact,  both  rent  and  profits  are  of  the  nature  of 
compensation  for  risk.  The  amount  received  may  be 
greater  than  the  amount  lost,  or  it  may  be  less.  This  will 
depend  largely  upon  the  temperament  of  the  capitalists 
as  a  body.  But  of  the  fact  of  such  losses  there  can  be  no 
question  whatever. 

§  323.  Many  of  the  writers  who  treat  of  the  relation 
between  business  risk  and  business  profit  make  the  mis- 
take of  assuming  that  profits  are  an  amount  paid  to  the 
individual  capitalist  to  cover  his  risk  of  loss.     Far  from 


MISTAKES  OF  SPECULATORS.  289 

it.  They  are  paid  to  capitalists  as  a  class  for  protecting 
the  public  against  its  risk  of  loss.  They  are  charges 
which  the  capitalists  make,  not  for  insuring  themselves, 
but  for  insuring  society  against  the  losses  incident  to 
industrial  experiment  and  industrial  progress. 

§  324.  The  prevailing  theory  of  economic  rent  ignores 
the  extent  of  these  losses.  It  assumes  that  future  prices 
can  be  foreseen  with  a  considerable  degree  of  accu- 
racy. It  assumes  that  the  marginal  laborer  and  the  mar- 
ginal unit  of  capital  do  in  fact  contribute  to  the  product 
an  amount  equal  to  the  valuation  which  is  placed  on  their 
services.  But  this,  is  notoriously  untrue.  The  marginal 
laborer  is  often  employed  at  a  rate  of  wages  which  ex- 
ceeds the  total  amount  that  the  consumer  ever  pays  for 
the  product  of  his  labor.  The  marginal  unit  of  capital 
receives  a  return  in  the  form  of  interest  which  is  often 
decidedly  in  excess  of  the  advantage  which  the  speculator 
derives  from  its  use.  If  the  product  of  such  labor  and 
capital  were  immediately  available  for  consumption  such 
mistakes  would  not  be  made ;  but  as  matters  stand  at 
present  they  are  always  being  made  on  a  small  scale,  and 
often  on  a  large  one.  These  mistakes  are  likely  to  con- 
tinue as  long  as  Ave  have  industrial  progress.  Society  at- 
tempts to  reduce  them  to  a  minimum  by  a  system  which 
is  intended  to  place  the  control  of  industry  in  the  hands 
of  those  who  have  proved  their  foresight,  and  to  elimi- 
nate those  who  have  made  the  mistakes.  But  in  spite  of 
this  process  of  natural  selection,  which  makes  the  judg- 
ment of  speculators  as  a  class  better  than  that  of  the 
average  man,  the  number  of  serious  errors  is  very  great 
indeed.* 

*  The  various  doctrines  which  base  the  rates  of  wages  and  interest  upon 
the  actual  contributions  of  marginal  laborers  and  capitalists  to  the  product 
of  industry  habitually  ignore  the  effect  of  these  mistakes.  To  justify  their 
method  of  reasoning,  the  advocates  of  these  doctrines  would  be  compelled 
to  prove  either  (i)  that  the  actual  value  of  the  product  of  labor  and  capital 
does  in  fact  conform  to  the  expectations  of  the  speculators  ;  or  (2)  that  an 
>9 


290  PROFITS. 

§  325.  Ricardo  of  course  knew  about  these  mistakes ; 
but  he  assumed  that  they  could  be  quickly  rectified — that 
no  man  would  stay  long  in  a  business  which  was  unprofi- 
table. He  thought  that  if  wages  in  any  particular  line 
were  momentarily  raised  too  high  and  prices  depressed 
too  low,  a  speedy  withdrawal  of  capital  would  almost  cer- 
tainly follow.  Two  things  led  him  into  this  mistake.  In 
the  first  place,  the  industries  of  Ricardo's  time  were  for  the 
most  part  conducted  on  a  much  smaller  scale  than  they  are 
to-day.  A  number  of  independent  producers  supplied  the 
market.  The  most  that  the  community  had  to  fear  under 
such  circumstances  was  a  slight  excess  or  slight  deficiency 
of  the  supply  of  products  ;  and  as  independent  producers 
were  constantly  entering  or  leaving  business  such  an  excess 
speedily  cured  itself.  In  the  second  place,  Ricardo  was 
a  banker  and  dealt  with  those  forms  of  capital  which 
could  be  most  quickly  transferred  from  less  profitable 
to  more  profitable  lines.  Although  Ricardo  combined 
the  experience  of  a  landlord  with  that  of  a  banker  his 
theory  of  rent  represents  essentially  a  banker's  view  of 
farming,  which,  like  a  farmer's  view  of  banking,  takes 
much    more   account  of   the  profits  than    of   the  losses. 

under-estimate  of  the  advantage  of  using  a  process  which  promises  remote  re- 
turns is  just  as  probable  as  an  over-estimate,  so  that  the  mistakes  of  specula- 
tors may  be  treated  as  balancing  one  another  ;  or  (3)  that  such  mistakes  as 
are  made  will  serve  to  teach  their  lesson  in  so  short  a  time  that  no  change  in 
the  habits  of  society  will  intervene  to  prevent  them  from  correcting  them- 
selves. 

Of  these  alternatives  (i)  is  obviously  untrue  ;  (2)  is  so  far  dependent  upon 
national  character  that  it  is  inadmissible  as  a  general  assumption  ;  while  (3) 
is,  to  say  the  least,  open  to  very  grave  doubts  which  the  exponents  of  the 
theory  of  marginal  contributions  have  made  no  adequate  attempt  to  remove. 
For  instance  :  if  wages  in  a  particular  trade  are  made  higher  than  the  actual 
outcome  of  industrial  processes  ultimately  warrants,  the  habits  of  living  of 
the  laborers  may  change  before  the  mistake  is  discovered  and  render  an 
adjustment  to  the  old  basis  out  of  the  question.  The  mistakes  of  speculators 
render  the  problem  a  dynamic  one  (§  27)  so  frequently  as  to  justify  us  in 
challenging  the  claims  of  a  statical  solution  to  be  considered  as  any  solution 
at  all. 


LOSSES  OX  FIXED   CAPITAL.  29I 

He  assumes  that  there  may  be  a  permanent  profit  due  to 
monopoly  of  location,  while  any  permanent  loss  will  be 
avoided  by  withdrawal  of  capital.  But  modern  capital  is 
not  ordinarily  invested  in  such  forms  that  it  can  be  readily 
withdrawn  or  transferred  from  an  unprofitable  use.  In 
a  large  and  increasing  part  of  our  investments  capital  is 
irrevocably  _/f-ir^  (§  141).  Labor  has  been  applied  in  such 
a  shape  that  its  ultimate  product  cannot  be  obtained  for 
a  long  term  of  years.  If  such  labor  has  proved  especially 
advantageous  to  society,  land  laws  and  patent  laws  confer 
special  advantages  on  the  investor.  But  if  for  any  reason 
it  has  proved  unremunerative,  withdrawal  is  impossible 
without  great  sacrifice.  The  positive  rent  which  Ricardo 
saw,  and  the  positive  profits  of  which  his  successors  have 
made  so  much,  are  counterbalanced  by  losses  both  on 
real  estate  and  on  personal  property  which  are  perhaps 
greater  than  the  aggregate  amount  of  differential  gains 
made  by  the  more  successful  investors. 

§  326.  Several  circumstances  may  give  rise  to  such  loss. 
The  most  important  are  :  i.  Technical  failure,  where  an 
investment  of  capital  does  not  produce  the  physical  result 
that  was  expected.  2.  Industrial  progress,  where  an  in- 
vestment of  capital  works  well  for  a  time,  but  must  give 
place  to  a  better  one  before  the  accumulated  profits  have 
paid  for  its  original  cost.  3.  Over-competition,  where  a 
useful  method  is  applied  by  so  many  independent  invest- 
ors as  to  make  the  price  of  its  products  disproportionately 
low.  4.  Contraction  of  credit,  which  reduces  the  general 
level  of  prices,  and  thus  makes  the  investment  unre- 
munerative to  the  man  who  has  made  it,  even  though  it 
be  otherwise  perfectly  adapted  to  the  needs  of  society. 

§  327.  Of  these  causes  of  loss,  technical  failure,  though 
often  the  most  conspicuous,  is  probably  the  least  impor- 
tant. The  evils  resulting  from  this  source  are  so  obvious 
that  they  serve  as  a  warning  for  other  investors,  and  to 
make  the  repetition  of  the  same  mistake  improbable. 


292  PROFITS. 

§  328.  The  losses  from  industrial  progress  are  less  obvi- 
ous but  more  widespread.  The  discovery  of  a  new  pro- 
cess may  render  a  mass  of  old  investments  useless.  The 
invention  of  the  power  loom  represented  a  great  loss  to 
the  owners  of  capital  invested  in  hand  looms.  The  inven- 
tion of  the  railroad  quickly  rendered  canal  property  unre- 
munerative.  Few,  even  among  the  more  conservative 
investors,  make  proper  allowances  for  the  danger  connected 
with  the  invention  of  new  processes.  The  owner  of  a  fac- 
tory, in  estimating  his  profits,  is  often  content  to  deduct 
the  depreciation  due  to  the  wear  and  tear  of  machinery  ; 
and  if  he  makes  a  further  deduction  as  the  patent  rights 
which  have  given  him  an  advantage  over  his  competitors 
draw  to  a  close,  he  deems  that  he  is  pursuing  a  conserva- 
tive policy.  A  board  of  railroad  directors  is  satisfied  with 
insisting  that  a  certain  sum  shall  be  set  apart  from  current 
receipts  to  keep  the  track  and  equipment  at  a  high  stand- 
ard of  efficiency.  But  there  is  a  probable  source  of  dan- 
ger which  is  not  adequately  met  by  depreciation  accounts 
in  a  factory  or  by  maintenance  accounts  in  a  railroad. 
Even  when  these  deductions  are  made  on  a  liberal  basis 
they  do  not  provide  a  reserve  fund  to  insure  the  investor 
against  the  chance  of  total  loss  in  case  other  competitors 
bring  into  use  new  methods.  This  loss  is  not  of  a  kind 
which  can  readily  be  estimated  in  accounting  or  be  de- 
ducted from  the  sum  available  for  dividends,  but  it  repre- 
sents a  great  reduction  in  the  profits  earned  by  owners  of 
fixed  capital  as  a  class.    - 

§  329.  Nor  are  landowners  exempt  from  these  dangers. 
Much  of  Henry  George's  reasoning  is  based  upon  the 
assumption  that  land  speculators  make  many  profits  and 
few  losses.  He  has  probably  over-estimated  the  former, 
and  has  quite  certainly  under-estimated  the  latter.  The 
amount  of  capital  which  has  been  sunk  in  developing 
real  estate  that  proves  unprofitable  is  something  for 
which  it  is  impossible  to  obtain  accurate  statistics  ;  but  a 


LOSSES  ON  REAL  ESTATE.  293 

close  observation  of  real  estate  values  will  indicate  that 
it  is  very  great.  The  New  England  farm  represents  a 
large  amount  of  capital  which  was  rendered  unremunera- 
tive  by  the  competition  of  farms  elsewhere.'  A  change 
in  the  current  of  population  has  often  destroyed  all  profits 
from  real  estate  in  which  much  capital  has  been  irrevo- 
cably fixed.  The  development  of  new  means  of  transpor- 
tation by  which  wheat  could  be  shipped  from  a  distance 
has  played  havoc  with  the  farm  values  of  England  and  of 
the  American  seaboard.  It  is  not  true,  as  Ricardo  as- 
sumes, that  the  normal  price  of  wheat  just  remunerates 
the  last  producer,  and  that  any  farmer  for  whom  it  fails 
to  be  remunerative  can  speedily  withdraw  from  the  mar- 
ket. In  order  to  compete  in  the  production  of  wheat 
large  investments  of  capital  are  necessary.  To  bring 
producers  into  the  market  the  price  must  be  high  enough 
to  cover  their  expenses,  including  interest  on  fixed  capi- 
tal, or  at  least  to  make  investors  think  that  it  will  do 
so.  But  when  once  they  have  entered  into  competi- 
tion they  cannot  withdraw  without  a  very  considerable 
loss  of  fixed  capital.  If  the  price  per  bushel  of  wheat 
for  a  group  of  producers  is  fifty  cents  over  and  above 
interest,  or  eighty  cents  including  interest,  they  will 
not  go  into  the  business  unless  they  expect  to  get 
eighty  cents  ;  but  once  in,  they  will  not  go  out  until  the 
price  nears  fifty  cents.  This  difference  between  eighty 
cents  and  fifty  cents  leaves  room  for  a  large  margin  of 
loss.  If  the  price  falls  to  the  lower  figure  the  same  differ- 
ences continue  to  exist  which  the  Ricardian  theory  re- 
quires ;  but  they  are  differences  of  disadvantage  rather 
than  differences  of  advantage.  Moreover,  as  shown  by 
Carey,  there  are  changes  of  method  in  agriculture  as  well 

'  The  beginnings  of  this  process  were  clearly  noted  by  Carey,  whose  ob- 
jections to  the  Ricardian  theory  of  rent  deserve  more  consideration  than 
they  have  received.  Carey's  ideas  have  been  further  developed  by  Patten,  in 
his  "  Premises  of  Political  Economy,"  Philadelphia,  1886. 


294  PROFITS, 

as  in  other  lines  of  industry.  The  first  settlers  occupy 
the  lands  which  are  most  accessible  and  easily  brought 
into  use.  Subsequent  settlers  take  those  which  require 
more  capital  for  their  development,  and  as  transportation 
becomes  cheaper  choose  lands  which  are  more  remote  but 
also  more  fertile.  The  large  production  of  these  new 
competitors  often  forces  down  the  price  of  products  below 
the  amount  which  it  costs  to  obtain  them  on  the  older 
farms,  and  renders  the  capital  invested  in  these  farms 
unprofitable  to  its  owners. 

§  330.  Even  if  a  process  continues  to  be  successful  for 
a  long  term  of  years,  each  capitalist  is  constantly  in  dan- 
ger from  over-competition  on  the  part  of  other  capitalists. 
It  is  impossible  for  different  investors  to  know  accurately 
what  other  investors  are  doing.  If  prices  are  high  in  a 
particular  line  of  industry  a  number  of  capitalists  will 
simultaneously  arrange  to  take  advantage  of  those  prices 
and  to  secure  a  share  of  the  exceptional  profits  which 
have  prevailed.  When  a  great  many  people  try  to  do 
this  prices  will  fall  and  all  investments  in  that  line,  old 
as  well  as  new,  may  be  rendered  unprofitable.  This  state 
of  things  is  known  as  over-production.  The  use  of  the 
term  over-production  does  not  mean  that  more  goods 
are  produced  than  the  community  can  consume,  but  more 
than  the  community  can  pay  for  at  prices  which  cover 
the  expense  to  the  producers.  The  larger  the  fixed 
capital  involved  in  an  industry,  the  greater  is  the  danger 
of  such  over-production.  We  see  this  danger  illustrated  in 
the  history  of  iron  and  steel,  of  shipping,  of  railroads,  and 
in  most  of  the  distinctively  modern  forms  of  manufac- 
turing enterprise.  We  find  alternations  between  periods 
of  inadequate  supply,  where  products  are  scarce  and 
profits  large,  and  periods  of  over-supply,  where  products 
are  so  abundant  as  to  be  sold  at  a  sacrifice,  and  profits  are 
not  only  destroyed  but  converted  into  losses.  The  fac- 
tory and  the  railroad  put  their  goods  or  services  on  the 


O  VER-PROD  UCTION.  295 

market  at  .prices  which  fail  to  pay  interest  or  even  main- 
tenance. The  owners  have  invested  their  capital  in  a 
form  which  they  cannot  readily  change.  If  they  abandon 
the  field  to  other  competitors  it  may  prove  a  total  loss. 
It  is  better  to  lose  a  dollar  on  every  ton  of  traffic  shipped 
than  to  lose  two  dollars  on  every  ton  of  traffic  sacrificed. 
The  only  limit  to  this  process  of  cut-throat  competition  is 
found  either  in  the  absolute  exhaustion  of  some  of  the 
competitors,  or  in  the  growth  of  population  to  a  point 
where  the  demand  at  remunerative  prices  is  equal  to  the 
normal  productive  capacity  of  the  whole  body  of  com- 
peting investments. 

§  331.  Over-production  is  liable  to  take  place  in  any  line 
of  industry  involving  large  fixed  capital.  Occasionally 
it  will  occur  in  one  line  only,  without  involving  oth- 
ers ;  in  which  case  it  is  more  properly  discribed  as  dis- 
proportionate production.  The  depression  in  American 
railroads  in  1888,  while  other  lines  of  industry  were  gen- 
erally prosperous,  furnished  an  instance  of  this  kind.  But 
it  will  commonly  happen  that  the  phenomena  of  over- 
production are  not  due  so  much  to  excess  of  supply  in 
one  line  as  to  contraction  of  demand  in  a  number  of  lines 
simultaneously.  Such  a  contraction  is  the  central  fact  in 
any  commercial  crisis.  These  crises  have  occurred  with 
tolerable  regularity  ever  since  the  introduction  of  applied 
steam  power.  They  have  usually  come  once  in  ten  or 
eleven  years, — a  fact  which  led  some  observers  to  connect 
them  with  sun  spots  which  have  a  period  of  the  same 
length.  But  no  one  could  say  just  why  the  sun  spots 
produced  the  crises,  and  this  theory  has  been  generally 
set  aside  for  lack  of  proof.  The  accepted  view  of  the 
phenomena  of  commercial  crises  makes  them  the  result  of 
contractions  in  credit  of  the  kind  described  in  chapter  viii. 

§  332.  The  aggregate  volume  of  pecuniary  transactions 
which  can  be  performed  in  the  course  of  a  year  with  a 
given  reserve  of  money  depends  upon  the  efficiency  of 


296  PROFITS. 

the  credit  system  ;  that  is,  in  general,  upon  the  freedom 
with  which  banks  are  able  and  willing  to  insure  the  pay- 
ment of  money  in  the  future  by  people  who  have  not  the 
money  in  hand  at  present.  If  for  any  reason  the  banks 
are  compelled,  or  think  themselves  compelled,  to  reduce 
the  accommodation  of  this  kind  which  they  give  the  mer- 
cantile community,  the  men  who  wish  to  deliver  money 
cannot  pay  so  much,  and  of  course  men  who  wish  to  re- 
ceive money  cannot  obtain  so  much.  The  decrease  in  the 
effective  circulation  of  money  causes  a  decrease  of  the 
volume  of  business.  Either  the  physical  amount  of  the 
transactions  must  be  lessened  or  the  average  level  of 
prices  must  fall.  Each  of  these  things  causes  commercial 
disaster.  A  fall  in  price  prevents  a  great  many  people 
from  fulfilling  their  contracts.  A  fall  in  the  number  of 
transactions  prevents  some  of  them  from  getting  what 
they  need  as  consumers  and  from  selling  their  surplus  as 
producers.  We  have  a  congestion  in  all  the  channels  of 
trade.  We  find  all  the  phenomena  of  over-production  in 
a  great  number  of  different  lines,  not  because  the  invest- 
ments in  those  lines  have  been  disproportionate  to  one 
another,  but  because  the  contraction  of  credit  makes  the 
general  production  of  the  community  disproportionate  to 
the  means  of  getting  it  into  the  right  hands.' 

This  is,  in  brief,  the  description  of  a  modern  commercial 
crisis.  With  varying  details  but  with  the  same  general 
features,  it  has  been  illustrated  in  1825,  1837,  1847,  i857» 
1873,  1884,  and  1893.  As  exchange  and  transportation 
have  developed,  crises  have  become  more  and  more  uni- 
versal in  their  pressure.  As  matters  stand  today,  there  is 
scarcely  an  industrial  nation  which  stands  apart  from  their 
evil  influence.  A  paralysis  of  credit  and  trade  in  one 
country  commonly  makes  itself  felt  in  the  others. 

'  Newcomb  has  an  interesting  analysis  of  these  events,  showing  how  a 
contraction  in  the  "monetary  circulation  "  of  means  of  payment  produces 
a  corresponding  effect  on  the  "  industrial  circulation  "  of  goods  and  services 
which  consumers  are  anxious  to  receive  and  producers  to  render. 


COMMERCIAL   CRISES.  2,<^'J 

%  333-  The  order  of  events  in  such  a  crisis  is  generally 
this: 

(i)  A  shock  to  public  confidence  in  a  period  of  liberal, 
not  to  say  inflated,  credit,  creates  a  demand  for  ready 
money.  No  one  is  sure  that  his  neighbor  will  remain 
solvent.  Each  man  is  therefore  anxious  to  secure  him- 
self against  future  loss.  Every  borrower  seeks  means  of 
paying  his  obligations  and  increases  the  demand  for 
money ;  almost  every  capitalist  tries  to  enlarge  his  cash 
reserves  and  thus  lessens  the  available  supply. 

(2)  This  increase  of  demand  and  diminution  of  supply 
at  first  puts  up  the  interest  rate  on  short-time  loans. 
Money  is  needed  to  tide  over  the  immediate  exigency, 
and  every  one  is  willing  to  pay  large  prices  in  order  to 
obtain  it.  But  this  is  only  a  temporary  measure.  Under 
the  stress  of  need  for  securing  money,  people  who  have 
engagements  to  meet  sell  their  goods  at  a  sacrifice  in 
order  to  obtain  it.  An  unusually  large  supply  of  products 
and  securities  is  thrown  upon  the  market  just  at  the  time 
when  many  property  owners  feel  themselves  least  able  to 
invest,  and  when  some  consumers  are  restricting  their 
purchases  instead  of  expanding  them.  The  temporary 
increase  in  the  interest  rate  gives  place  to  a  more  lasting 
fall  in  prices. 

(3)  Such  a  fall  in  prices  lowers  profits.  A  large  num- 
ber of  people  have  made  engagements  with  their  creditors 
and  with  their  employees  based  on  the  supposition  that 
prices  will  continue  at  the  old  level.  If  there  has  been 
a  period  of  inflation,  the  prevailing  rate  of  wages  and  of 
interest  have  both  been  driven  up  to  a  high  figure  on 
account  of  the  large  profits  realized  by  active  speculators. 
A  fall  in  price  renders  it  impossible  to  pay  interest  out  of 
current  earnings.  Readjustments  and  foreclosures  follow 
one  another  in  rapid  succession.  In  cases  where  the 
lenders  of  money  have  obtained  proper  security  the  con- 
tracts are   maintained  at  the  expense  of  the  principal  of 


298  PROFITS. 

the  borrowers.  If  a  railroad  bond  is  really  secured  by 
stock  behind  it,  the  loss  falls  on  the  stockholders,  and 
the  bondholders,  ultimately  at  any  rate,  receive  all  that 
the  interest  contract  called  for.  But  if,  as  frequently 
happens,  the  security  has  been  a  delusive  one,  the  lend- 
ers are  compelled  to  assent  to  a  reduction  of  the  interest 
which  they  believed  to  be  safely  guaranteed. 

(4)  When  the  interest  contracts  have  been  in  large 
measure  readjusted,  the  chief  effect  on  wages  begins  to 
make  itself  felt.  It  might  be  supposed,  on  general 
grounds,  that  a  fall  in  price  would  affect  the  laborer 
sooner  than  the  investor,  because  wage  contracts  are 
made  for  short  periods  and  are  liable  to  readjustment  at 
any  moment,  while  interest  contracts  are  made  for  a  long 
term  of  years.  But  in  the  early  stages  of  a  commercial 
crisis  the  capitalist  is  not  in  a  position  to  dictate  terms  to 
his  laborers.  He  must  make  goods  and  sell  goods  at  any 
price,  in  order  to  keep  his  head  above  water.  As  long  as 
it  lasts,  the  cut-throat  competition  which  lowers  profits 
prevents  the  demand  for  labor  from  being  very  rapidly 
lessened.  It  is  when  readjustments  of  interest  have  been 
made  that  the  laborers'  condition  becomes  worst.  After 
foreclosure  sales  have  been  completed  and  capital  is  re- 
organized on  a  new  basis,  no  capitalist  is  necessarily  com- 
pelled to  work  at  a  loss,  and  some  probably  go  out  of 
work  altogether.  Under  these  circumstances  the  demand 
for  labor  becomes  appreciably  less  than  it  was,  and  the 
price  offered  falls  rapidly.  The  first  moderate  changes 
are  as  a  rule  accepted  by  the  laborers  as  inevitable,  but 
as  reductions  become  more  sweeping  they  are  resisted, 
particularly  because  house  rents  and  consumers*  prices, 
owing  to  the  inertia  of  retail  trade,  do  not  fall  nearly  as 
fast  as  producers'  prices.  The  workman  sees  his  wages 
reduced  because  his  employer  cannot  sell  goods  at  the  old 
figure,  while  the  price  that  he  pays  for  his  supplies  remains 
nearly  the  same.     He  thinks  that  something  is  wrong, 


i 

4^ 


READJUSTMENT  OF   VALUES.  299 

and  strikes.  This  usually  indicates  the  beginning  of  the 
end  of  a  commercial  crisis.  It  has  become  a  proverb 
in  the  financial  world  that  railroad  strikes  give  no  help  to 
those  who  are  trying  to  depress  the  price  of  securities. 
On  the  contrary,  in  spite  of  the  losses  attending  such 
conflicts,  it  has  been  found  in  1877,  1885,  and  1894  that 
the  price  of  securities  in  general  began  to  go  up  at  the 
very  time  when  matters  seemed  to  be  at  their  worst. 
There  are  two  reasons  for  this.  First,  strikes  cut  down 
production  in  any  given  line  to  such  an  extent  as  to  en- 
able competing  producers  to  dispose  of  their  products  or 
services  more  readily.  Second,  strikes  indicate  that  wage 
contracts,  as  well  as  interest  contracts,  have  been  read- 
justed to  the  price  conditions  which  prevail,  and  that 
matters  have  therefore  reached  a  point  where  speculators 
can  make  arrangements  for  the  future  with  the  assurance 
that  the  marginal  price  charged  by  labor  and  capital  for 
their  services  does  not  exceed  the  market  price  which  the 
consumers  are  likely  to  pay  for  the  results  of  such  service. 

§  334.  Until  this  process  is  substantially  complete, 
actual  prices  do  not  correspond  to  the  assumptions  of 
the  marginal  theory  of  value.  The  price  which  con- 
sumers are  ready  to  pay  for  the  products  of  industry  is 
less  than  the  marginal  expense  of  those  products — in- 
cluding in  this  expense,  as  we  properly  must,  a  return  on 
capital  invested.  Some  men,  in  trying  to  cover  the  cost, 
fail  to  sell  their  products ;  others,  in  trying  to  sell  their 
products,  fail  to  cover  the  cost.  So  far  as  producers  are 
able  to  fulfil  their  contracts  as  to  interest  and  wages — 
and  in  the  theory  both  of  economics  and  of  law  they 
should  do  so  completely — the  loss  falls  on  rent  and 
profits  and  may  convert  the  expected  surplus  from  these 
sources  into  a  deficit  of  large  amount. 

§  335-  The  distributive  process,  whose  workings  have 
been  described  in  this  chapter,  may  be  summed  up  as 
follows : 


300  PROFITS, 

The  competition  of  capitalists  with  one  another  leads 
them  to  advance  to  the  laborers  a  sum  equal  to  the  ex- 
pected price  of  the  product,  less  a  compensation  for  wait- 
ing and  the  risks  attendant  upon  it,  sufficient  to  induce 
the  proprietors  to  hazard  the  required  amount  of  capital. 
The  advances  constitute  wages  ;  the  excess  of  the  product 
above  such  advances  constitutes  profits. 

By  a  somewhat  similar  process  the  competition  of  the 
more  active  capitalists  with  one  another  leads  them  to 
guarantee  to  those  who  will  lend  them  capital  a  fixed  rate 
of  income  for  the  use  of  such  capital.  This  income,  guar- 
anteed but  not  advanced,  is  known  as  interest ;  the  re- 
maining profit  is  known  either  as  net  profit  for  skill  in 
management,  or  economic  rent  for  foresight  in  invest- 
ment. The  separation  of  interest  from  net  profit  or  rent 
results  in  a  separation  of  the  reward  for  waiting  from  the 
rewards  for  risk  and  foresight. 

Wages  are,  in  all  ordinary  cases,  guaranteed  and  ad- 
vanced by  capitalists  as  a  body.  Interest  is  guaranteed, 
but  not  advanced,  by  one  group  of  capitalists  to  another. 
The  justice  of  the  charge  made  for  such  guarantees  and 
advances  is  to  be  defended,  not  because  the  enjoyment  of 
interest  corresponds  to  the  sacrifice  of  waiting  or  because 
the  amount  of  profit  corresponds  to  the  risk  of  loss,  but 
because  society  finds  itself  best  served  by  the  system  of 
guarantees  and  advances  which  the  institutions  of  wages 
and  interest  serve  to  encourage. 


CHAPTER  X. 

WAGES. 

Piece- Wage  and  Time-Wage — What  Constitutes  Demand  for  Labor — The 
Popular  Theory — The  Wage-Fund  Theory — The  Residual  Theory — 
The  Laborer  as  a  Consumer — Wages  Depend  on  Maximum  Economy 
of  Consumption — With  Some  Men  this  is  Obtained  by  Low  Wages  and 
Low  Efficiency,  with  Others  by  High  Wages  and  High  Efficiency. 

F.  A.  Walker  :  "  The  Wages  Question  :  a  Treatise  on  Wages  and  the 
Wages  Class."     New  York,  1876. 

F.  W.  Taussig :  "  Wages  and  Capital :  an  Examination  of  the  Wages- 
Fund  Theory."     New  York,  1896. 

§  336.  Wages,  under  the  modern  competitive  system, 
are  the  discounted  product  of  industry.  They  are  what 
capitalists  are  ready  to  advance  on  the  expectation  of  a 
future  return.  The  competition  of  different  employers 
with  one  another,  where  it  is  at  all  active,  prevents  them 
from  making  their  rate  of  discount  arbitrary  in  amount. 

The  expected  value  of  the  product,  less  the  discount, 
gives  the  labor  cost  per  unit  of  product,  or  piece  wage. 
The  piece  wage  received  by  any  workman  multiplied  by 
the  number  of  pieces  which  he  makes  in  a  day,  consti- 
tutes his  day's  earnings  or  jiominal  wage.  The  amount 
of  comforts  which  he  can  buy  with  the  money  received  as 
nominal  wages  represent  his  real  wage.  If  A  is  getting 
$2.50  a  day  while  B  is  getting  only  $2.00,  his  nominal 
wages  are  one  fourth  higher;  but  if  he  has  to  make  his 
purchases  in  a  market  where  the  general  level  of  prices  is 
fifty  per  cent  higher  than  those  paid  by  B,  his  real  wages 
are  one  sixth  lower  than  ^'s.     For  the  $2.00  which  B 


302  WAGES. 

receives  will  buy  as  much  as  A  could  obtain  with  $3.00, 
and  decidedly  more  than  he  obtains  with  $2.50. 

Strictly  speaking,  both  nominal  and  real  wages  should 
be  estimated  by  the  year  (or  even  by  the  lifetime),  rather 
than  by  the  day,  in  order  to  show  anything  about  the 
financial  or  economic  condition  of  the  laborer;  because 
the  regularity  and  duration  of  employment  is  so  much 
less  in  some  trades  than  in  others  that  the  same  receipts 
per  working  day  mean  very  different  things  in  the  long 
run.  In  practice,  however,  it  is  usual  to  quote  nominal 
wages  by  the  day,  and  then  make  corrections  for  irregu- 
larity of  employment,  limited  duration  of  labor  power, 
and  other  factors  of  this  sort  which  affect  our  inferences 
from  the  apparent  height  of  the  wage  figures. 

§  337-  The  cost  of  labor  to  the  employer  is  naturally 
measured  by  the  piece ;  the  return  for  labor  to  the  work- 
man is  naturally  measured  by  the  day  or  year.  This 
does  not  mean  that  the  employer  will  always  wish  to  pay 
his  laborers  by  the  piece,  or  that  the  laborers  will  always 
prefer  to  be  paid  by  the  day.  The  choice  between  the 
two  systems  will  depend  chiefly  upon  the  line  of  employ- 
ment. Time  wages  prevail  in  agriculture,  in  trades,  in 
personal  service,  and  in  the  higher  grades  of  mechanical 
work;  piece  wages,  in  mechanical  work  of  ordinary 
grades. 

Under  the  system  of  time  wages  the  workman  has  no 
immediate  or  obvious  incentive  to  increase  his  output. 
A  large  part  of  the  time  and  strength  of  the  foreman  is 
occupied  in  keeping  the  men  under  his  charge  up  to  a 
proper  standard  of  efficiency.  To  avoid  this  difficulty, 
the  introduction  of  piece  wages  is  the  most  obvious  ex- 
pedient. Under  this  system  the  workman  is  paid,  not  on 
the  basis  of  time  occupied,  but  on  the  basis  of  work  done  ; 
not  by  the  hour  or  the  day,  but  by  the  yard,  the  pound, 
or  some  other  unit  of  measure.  If  one  operative  turns 
out  twice  as  many  goods  as  another,  he  receives  twice  as 


i 


PIECE-WORK  AND    TIME-WORK.  303 

much  pay.  He  thus  has  an  incentive  to  work  rapidly. 
In  fact,  the  danger  is  that  he  may  work  too  rapidly  for 
his  own  good  or  for  that  of  his  work.  Under  the  piece- 
work system  there  is  little  need  of  insisting  on  quantity, 
but  much  need  of  insistingon  quality.  Where  the  latter 
object  can  readily  be  secured  by  a  simple  process  of  in- 
spection, the  employer  always  prefers  to  pay  by  the  piece  ; 
where  this  is  impossible,  he  has  to  pay  by  time.  In  tex- 
tile weaving,  where  the  grades  of  goods  are  simple  and 
definite,  it  is  easy  for  an  inspector  to  say  whether  a  cer- 
tain piece  of  cloth  should  be  passed  or  rejected.  Weav- 
ing is  therefore  done  by  the  piece  ;  the  inspector  looks 
out  for  the  quality  and  the  operative  for  the  quantity. 
But  in  the  work  of  a  machinist,  where  it  is  impossible  to 
inspect  the  results  quickly  and  surely,  the  workman  must 
be  given  every  incentive  to  do  his  work  well  rather  than 
to  do  it  hurriedly.  He  is  therefore  paid  by  the  day  ;  he 
looks  out  for  the  quality  of  his  work  and  the  foreman  for 
its  quantity. 

§  338.  Differences  in  the  rate  of  wages  among  produ- 
cers of  marketable  goods  are  due  far  more  to  variations 
in  efificiency  than  to  variations  in  piece  wages.  If  we 
arrange  laborers  of  different  countries  in  the  order  of 
their  earning  power,  we  shall  find  a  corresponding  differ- 
ence in  their  efificiency.  America  stands  highest,  and 
England  next,  followed  by  other  countries  of  western 
Europe ;  the  efificiency  of  the  laborer  of  eastern  Europe 
is  much  lower,  and  that  of  India  lowest  of  all.' 

Nor  is  this  at  all  surprising.  Where  different  laborers 
compete  in  producing  the  same  article  for  the  same  mar- 
ket, there  are  many  things  which  tend  to  make  the  wage 
payments  per  unit  of  product  substantially  the  same  for 

'  F.  A.  Walker,  "  Political  Economy,"  p.  56.  For  fuller  details,  excel- 
lently presented  by  the  same  author,  see  "The  Wages  Question,"  ch.  iii. 
Similiar  conclusions  are  reached  by  Brassey,  Schoenhof,  and  Schulze- 
Gaevemitz. 


304-  WAGES. 

all  the  competitors.  If  the  piece  wage  for  one  group  of 
employers  differs  greatly  from  that  for  another,  competi- 
tion tends  either  (i)  to  force  the  price  of  the  product  so 
low  as  to  drive  the  high  cost  labor  out  of  business ;  or  (2) 
if  the  amount  of  low  cost  labor  is  inadequate  to  do  this, 
the  persistent  high  price  produces  an  extra  profit  to  the 
employers  of  low  cost  labor,  which  other  capitalists  are 
anxious  to  share ;  and  the  competition  of  new  capital, 
bidding  for  the  services  of  a  restricted  supply  of  low 
cost  labor,  forces  up  the  rate  of  piece  wages  which  the 
laborers  can  demand.  For  instance,  if  one  group  of 
laborers  makes  a  yard  of  cloth  for  ten  cents,  and  another 
group  charges  fifteen  cents  for  the  same  service,  it  gen- 
erally happens  either  that  the  employers  of  the  former 
group  flood  the  market  with  products  at  fourteen  cents 
and  drive  the  latter  group  out  of  business,  or  else  that  all 
sell  their  products  at  a  price  above  fifteen  cents,  and  that 
competition  between  different  capitalists  for  the  services 
of  the  low  cost  labor  forces  its  price  up  to  a  level  which 
leaves  only  the  ordinary  rate  of  profit.  In  the  former 
case  the  general  wage-level  would  go  down  to  ten  cents  ;  in 
the  latter  case  it  would  go  up  to  fifteen  cents  ;  in  either 
alternative  we  should  see  an  equalization  of  piece  wages 
among  such  laborers  as  continued  to  compete. 

§  339'  There  are  only  two  considerable  exceptions  to  the 
rule  here  laid  down,  (i)  When  different  competitors  use 
different  methods  of  production,  interest  may  take  a  larger 
share  of  the  product  in  the  one  case  than  in  the  other,  and 
equal  prices  of  products,  fixed  by  competition,  may  leave 
unequal  remainders  for  labor.  (2)  When  the  operation  of 
low  cost  labor  is  restricted  to  land  of  exceptional  advan- 
tage, or  otherwise  limited  by  monopoly,  there  may  not 
be  enough  competition  of  capital  to  give  the  low  cost 
laborer  the  advantage  of  his  superior  economy.  But  the 
importance  of  these  exceptions,  especially  the  former, 
is   much   overestimated.     One  of  the  facts  which  most 


V 

f 


PAYMENT  FOR   SERVICES.  305 

strongly  impresses  the  student  of  industrial  statistics  is 
the  comparatively  small  range  of  variation  in  piece  prices 
for  competing  goods,  even  where  the  conditions  of  pro- 
duction are  wholly  dissimilar. 

§  340.  On  the  other  hand,  the  labor  cost  of  services,  as 
distinct  from  goods,  shows  a  very  wide  range  of  variation. 
This  is  because  a  community  must  have  a  certain  number 
of  people  engaged  in  personal  and  professional  service, 
and  must  pay  them  wages  corresponding  to  what  their 
eflficiency  would  secure  if  they  ivere  engaged  in  the  produc- 
tion of  goods  for  market.  The  greater  the  productiveness 
of  industrial  labor  in  any  community,  the  higher  will  be 
the  cost  of  those  services  in  which  the  laborer  has  no  in- 
dustrial advantage  over  those  who  perform  similar  services 
elsewhere.  The  price  of  personal  and  professional  service 
in  America  is  high  because  the  people  who  render  it 
could  make  large  products  by  going  into  industrial  em- 
ployments.' To  induce  them  to  enter  the  former  field, 
they  must  be  paid  at  a  rate  based  upon  their  probable 
efificiency  in  the  latter. 

§  341.  In  occupations  requiring  no  special  skill,  if  the 
rate  of  wages  as  fixed  by  the  discounted  value  of  the  pro- 
duct is  insufficient  to  keep  the  laborer  alive,  the  number 
of  laborers  will  be  rapidly  reduced.  This  will  diminish 
the  supply  of  products  in  any  industry  where  it  occurs, 
and  will  increase  their  price.  This  process  will  go  on  in 
manufacturing  industries  until  the  discounted  price  of  the 
product  rises  high  enough  to  enable  the  laborer  to  buy  the 
necessary  amount  of  food  ;  it  will  go  on  in  agricultural 
industries  until  cultivation  is  restricted  to  more  advan- 
tageous lands  or  systems  of  tillage,  so  that  the  per  capita 
product   is   large   enough  to  maintain  the  workmen  in 

'  For  the  same  reason  we  are  apt  to  have  a  relatively  wide  margin  between 
wholesale  and  retail  prices  ;  because  the  American  retailer  charges  more  per 
day  for  his  services  than  the  foreign  retailer,  without  always  being  able  to 
handle  a  correspondingly  larger  amount  of  products  in  the  course  of  a  day. 


306  WAGES, 

undiminished  numbers.  Conversely,  if  the  rate  of  wages 
is  more  than  sufficient  to  keep  the  laborer  alive,  there  is  a 
similar  tendency  (though  not  so  universally  operative)  to 
increase  numbers  and  reduce  the  price  of  the  product, 
until  the  limit  of  subsistence  is  reached. 

In  occupations  of  higher  grade,  there  is  a  similar  mini- 
mum of  wages  fixed  by  the  cost  of  educating  and  maintain- 
ing a  laborer  in  the  manner  necessary  to  their  successful 
prosecution.  If  the  remuneration  of  high-grade  labor 
falls  below  the  cost  of  educating  and  supporting  it,  the 
number  of  laborers  must  necessarily  diminish  and  the  price 
of  products  will  tend  to  rise.  If,  on  the  other  hand,  the 
remuneration  is  in  excess  of  the  cost  of  education  and 
maintenance,  there  is  a  tendency  towards  increase  of 
number  of  laborers  and  fall  in  price  of  products. 

§  342.  It  might  seem  at  first  sight  as  though  we  had 
solved  the  problem  of  wages  by  thus  indicating  the  con- 
ditions under  which  the  supply  and  demand  of  labor  of 
any  grade  are  in  equilibrium.  But  when  we  look  closely 
at  the  relations  between  supply  and  demand  for  labor  in 
any  particular  trade,  we  are  confronted  with  a  new  diffi- 
culty. The  demand  for  labor  is  measured  by  the  piece  ; 
the  supply  of  labor  is  measured  by  the  day.  No  equa- 
tion between  the  two  is  possible  until  we  know  the  num- 
ber of  pieces  produced  in  a  day ;  and  this  is  often 
precisely  what  is  hardest  to  determine.  A  community 
stands  ready  to  employ  laborers  in  producing  10,000 
yards  of  cloth  at  ten  cents  per  yard,  1 1,000  at  nine  cents, 
12,500  at  eight  cents,  15,000 at  seven  cents,  etc.  Whether 
the  10,000  yards  of  cloth  be  made  by  1,000  men  earning 
$1.00  per  day  or  500  men  earning  $2.00  per  day  is  gener- 
ally a  matter  of  indifference  to  the  buyers.  On  the  other 
hand  we  find  1,000  men  ready  to  v/ork  in  cloth  factories 
at  $2.00  a  day,  900  at  $1.75,  800  at  $1.50,  700  at  $1.25, 
600  at  $1.00,  etc.  Whether  they  make  the  $2.00  by  pro- 
ducing 20  yards  at  ten  cents,  or  by  the  use  of  improved 


T 

4F- 


THE  MEDIEVAL   SYSTEM.  307 

machinery  which  will  enable  them  to  produce  25  yards  at 
eight  cents,  is  in  the  majority  of  cases  a  secondary  matter 
to  the  wage-earners.  Instead  of  one  solution  which  equa- 
lizes supply  and  demand  we  have  an  indefinite  number 
of  possible  solutions  based  on  the  varying  rate  of  speed  of 
different  laborers. 

§  343.  When  there  is  little  competition  of  capitalists, 
there  is  a  tendency  to  accept  the  solution  which  gives  the 
laborer  just  enough  to  keep  him  alive,  and  to  get  what 
service  can  be  obtained  from  a  body  of  workers  of  low 
eflficiency.  In  cases  of  this  kind  the  position  of  the  com- 
mon laborer  is  very  like  that  of  a  slave,  and  the  only 
escape  from  this  lot  is  by  combinations  of  labor  strong 
enough  for  physical  as  well  as  industrial  defense.  Under 
this  system,  which  was  substantially  that  of  mediaeval 
society,  we  find  : 

(i)  A  large  body  of  peasants,  producing  food  for  the 
whole  community,  and  receiving  enough  of  the  bare 
necessaries  of  life  to  keep  them  in  condition  to  work. 
The  only  thing  that  can  raise  their  condition  is  a  plague 
or  other  destructive  agency  which  so  reduces  their  num- 
bers as  to  give  a  scarcity  value  to  their  services,  lasting 
long  enough  to  establish  a  customary  rate  of  wages  higher 
than  that  which  they  had  previously  received — a  state  of 
things  exemplified  in  England  from  the  thirteenth  to  the 
fifteenth  century. 

(2)  A  body  of  craftsmen,  whose  numbers  are  determined 
chiefly  by  the  demand  of  the  rich  for  their  products,  who 
receive  enough  to  pay  the  expenses  incident  to  their  edu- 
cation and  the  maintenance  of  their  station  in  life,  and 
who  are  sufficiently  organized  to  resist  any  attempt  to  re- 
duce their  wages  below  this  figure. 

(3)  The  privileged  classes,  controlling  at  once  the  prop- 
erty and  the  political  power  of  the  nation,  who  use  the 
surplus  food  produced  by  the  peasants,  not  as  a  means  of 
giving  employment  to  labor,  but  as  a  means  of  supporting 


308  WAGES. 

in  idleness  a  number  of  persons  corresponding  to  the 
amount  of  available  food.  4. 

§  344.  It  is  the  theory  of  most  socialists  that  this  state 
of  things  continues  to  the  present  day ;  that  the  unor- 
ganized laborer  receives  starvation  wages ;  that  the  organ- 
ized laborer  is  able  to  insist  on  something  more  by  virtue 
of  combination  ;  but  that  the  property  owners  or  capital- 
ists are  the  residual  claimants  of  an  enormous  surplus. 
The  use  of  this  surplus  as  capital,  the  socialists  regard  as 
an  attempt  on  the  part  of  the  property  owners  to  pur- 
chase more  labor  at  starvation  rates  and  appropriate  a 
new  surplus  to  themselves.  In  other  words,  they  think 
that  the  modern  industrial  system  really  applies  mediaeval 
methods  of  distribution  to  the  increased  number  of  peo- 
ple which  the  use  of  modern  methods  of  production  has 
enabled  the  land  to  support.  They  believe  that  any  in- 
crease in  the  efficiency  of  labor  helps  the  employers  and 
not  the  employed.  A  single  laborer  may  raise  his  earnings 
by  increasing  his  speed  ;  but  he  thereby  increases  the  sup- 
ply of  labor,  reducing  the  piece  price  for  his  fellows  and 
for  himself.  The  socialists  (and  many  observers  who  are 
not  socialists)  think  that  if  one  group  of  persons  has  ready 
money,  or  things  which  can  be  converted  into  ready  money, 
while  another  group  has  labor  to  sell  for  this  money,  an 
increase  of  the  eflficiency  of  labor  will  put  the  latter  group 
at  a  disadvantage  in  all  its  bargains.  As  the  labor  makes 
more  products  the  price  of  products  will  be  cheapened. 
The  capitalists,  or  people  who  own  the  money,  will  be  in  a 
position  to  get  more  products  for  the  same  expenditure. 
If  they  increase  their  consumption  in  proportion  to  the 
increase  of  efficiency  of  labor,  they  will  enjoy  more  goods 
and  leave  the  laborers  neither  better  nor  worse  off  than 
they  were  before.  If  on  the  other  hand  they  do  not  thus 
increase  their  consumption,  some  of  the  laborers  will  be 
thrown  out  of  employment  and  left  to  starve. 

The  large  body  of  people  who  take  this  view  of  the 


T 


THE  POPULAR    THEORY,  309 

matter — often  without  really  formulating  it  in  detail — re- 
gard the  luxury  of  the  rich  as  being  on  the  whole  a  means 
of  preventing  harm  to  the  poor.  They  regard  free  ex- 
penditure of  the  capitalists'  money  as  a  gain  to  the  laborers, 
and  its  saving  as  a  loss.  Industry  on  the  part  of  the 
wealthy  sometimes  seems  to  them  a  greater  vice  than  idle- 
ness ;  for  by  the  exerciseof  industry  the  rich  man  appears 
to  take  the  bread  out  of  the  poor  man's  mouth  and  to  de- 
prive some  laborer  of  the  chance  for  a  living  in  order  to 
add  a  few  dollars  to  an  already  overgrown  fortune ;  while 
if  he  lives  in  idleness  and  buys  the  labor  of  others,  they 
think  that  he  at  least  transfers  some  part  of  his  wealth  to 
those  who  need  it  more  than  he  does.  They  often  look 
with  complacency  on  the  actual  destruction  of  wealth  as 
a  blessing  in  disguise.  The  broken  window  pane  or  burnt 
house  becomes  in  their  eyes  a  source  of  new  employment 
to  labor,  transferring  money  from  the  pockets  of  the  men 
who  own  property  to  those  of  the  men  who  are  dependent 
on  their  work  for  support.  Not  a  few  of  them  advocate 
inflation  of  the  currency,  by  every  conceivable  means 
whether  practicable  or  not,  in  the  belief  that  whatever 
increases  the  supply  of  money  increases  the  demand  for 
labor  and  the  advantage  of  the  laboring  classes. 

§  345.  This  view  of  the  matter  is  justly  criticised  as  a 
superficial  one.  It  looks  at  temporary  effects  on  nominal 
wages,  and  disregards  permanent  effects  on  real  wages. 
A  fire  may  increase  wage-payments  in  certain  trades  in  a 
particular  locality  ;  but  there  are  two  indirect  consequences 
of  the  fire  which  generally  make  the  apparent  advantage 
to  laborers  worse  than  illusory.  In  the  first  place,  the 
money  used  to  rebuild  the  burnt  house  is  almost  always 
diverted  from  some  other  line  of  expenditure,  so  that  the 
gain  to  one  group  of  workmen  is  offset  by  a  loss  to  other 
groups.  In  the  second  place,  this  utilization  of  labor  to 
replace  commodities  which  have  been  destroyed,  instead 
of  producing  new  ones,  means  that  the  community  in  the 


3IO  WAGES. 

end  has  fewer  comforts  and  enjoyments  than  it  could 
otherwise  have  commanded.  This  scarcity  shows  itself 
in  advanced  prices.  For  a  considerable  time  after  a  fire, 
house  rents  will  be  higher  than  they  were  before  ;  so  that 
the  same  amount  of  nominal  wages  means  less  available 
comfort  and  enjoyment.  The  laborers  are  producing  for 
one  another  as  well  as  for  the  capitalist.  They  are  spend- 
ing money  for  one  another's  products ;  as  consumers  they 
profit  by  an  increase  in  the  product,  or  suffer  by  its  dimin- 
ution. The  destruction  of  property  by  the  fire  does  not 
represent  something  taken  from  the  capitalist  and  given 
to  the  laborer.  It  represents  a  loss  of  comfort  in  the  com- 
munity from  which,  as  a  rule,  no  class  can  wholly  exempt 
itself. 

Nor  does  the  money  which  the  rich  man  saves  repre- 
sent something  taken  from  the  laborers  and  accruing  to 
the  capitalists  as  a  class.  The  man  who  saves  money  and 
invests  it  is  simply  spending  it  in  a  far-sighted  way,  and 
paying  laborers  for  services  which  meet  the  future  wants 
of  many  men  instead  of  the  present  luxuries  of  one 
man. 

The  man  who  spends  money  in  employing  laborers  on 
things  that  are  really  useless,  causes  food  to  be  consumed 
by  a  group  of  workers  who  leave  nothing  permanent  to 
show  for  it,  and  lessens  the  amount  of  useful  things  which 
the  community  can  enjoy  in  the  immediate  future.  He 
usually  does  more  harm  than  the  man  who  saves  money 
and  hoards  it  ;  for  while  hoarding  chiefly  affects  nominal 
wages,  unwise  expenditure  affects  real  wages.  The  harm 
done  by  the  miser  is  a  negative  one — he  fails  to  make  use 
of  the  opportunities  which  have  been  given  him.  The 
harm  done  by  the  spendthrift,  though  not  equally  obvious 
to  the  popular  vision,  is  a  positive  one — he  actually  leaves 
fewer  products  for  other  people  to  enjoy. 

If  we  look  at  real  wages  instead  of  nominal  ones,  at 
things  instead  of  money,  we  shall  see  that  it  is  not  the 


THE    WAGE-FUND    THEORY.  311 

wealth  that  the  capitahst  consumes  which  really  goes  to 
the  laborers,  but  the  wealth  that  he  does  not  consume.' 

§  346.  By  those  who  have  grasped  this  fact  it  is  uni- 
versally held  that  increased  production  due  to  efficiency 
of  labor  accrues  very  largely  to  the  laborers  themselves. 

During  the  early  part  of  the  present  century  the  great 
body  of  economists  believed  that  this  process  was  effected 
through  the  agency  of  what  they  called  a  wage-fund. 
This  fund  consisted  of  that  part  of  the  past  product  of 
the  community  which  was  not  consumed,  but  set  aside 
by  the  capitalists  to  assist  future  production.  In  the 
very  act  of  directing  productive  industry,  this  product 
was  transferred  from  the  capitalists  to  the  laborers  in  the 
form  of  a  wage-payment.  The  total  quantity  of  the 
unconsumed  product  thus  used  as  capital  represented  the 
aggregate  real  wages  of  the  community.  It  was  this  capi- 
tal and  not  the  desires  or  wants  of  the  consumers  which 
fixed  the  amount  received  by  the  laborers  as  wages.  De- 
sires and  wants  of  consumers  might  determine  the  direc- 
tion in  which  labor  was  applied  ;  they  did  not  determine 
the  quantity  of  its  aggregate  remuneration,  except  so  far 
as  they  might  cause  labor  to  be  misapplied  and  prevent 
the  future  capital  of  the  community  from  becoming  as 
great  as  it  otherwise  might  be.  If  a  man  employed  laborers 
in  trimming  a  lawn  instead  of  cultivating  a  wheat  field,  he 
did  not  thereby  either  increase  or  diminish  this  year's 
wages ;  these  were  determined  by  last  year's  product. 
But  he  diminished  the  amount  of  next  year's  real  wages, 
because  he  caused  less  wheat  to  be  produced,  and  thereby 

'  This  is  what  is  really  meant  by  the  somewhat  infelicitous  phrase,  used  by 
many  economists,  that  a  demand  for  commodities  is  not  a  demand  for  labor. 
The  demand  for  labor,  using  the  word  demand  in  its  older  sense  of  "  aggre- 
gate price  offered,"  rather  than  "  quantity  demanded,"  [(§  89,  note)]  is  not  to 
be  increased  by  increasing  the  price  which  consumers  are  compelled  to  pay 
for  commodities,  but  by  increasing  the  capital  available  for  the  maintenance 
of  labor.  The  personal  consumption  of  the  property  owners  is  no  measure 
of  the  amount  of  comforts  which  will  go  to  the  support  of  the  laborers. 


312  WAGES. 

lessened  the  amount  available  for  the  support  of  next 
year's  labor.  That  industry  was  limited  by  capital  and 
not  by  consumers'  wants,  constituted  the  cardinal  point  in 
the  wage-fund  theory.  Whatever  tended  to  increase  or 
diminish  public  capital,  tended  tc  increase  or  diminish 
the  fund  from  which  real  wages  were  paid,  and  by  which 
they  were  measured.  This  fund  could  be  increased  by 
efficiency  on  the  part  of  the  laborers,  or  by  saving  on  the 
part  of  the  property  owners.  It  could  be  diminished  by 
destruction  of  property,  by  idleness,  or  by  useless  luxury. 
If  the  laborers,  by  combination  or  by  favorable  circum- 
stances of  any  kind,  got  an  unduly  large  share  of  the 
national  income  in  one  period  of  production,  they  so 
lessened  the  rate  of  profit  that  the  inducement  to  save 
was  diminished  ;  and  this  tended  to  diminish  capital  and 
wages  for  the  years  following.  If,  on  the  other  hand,  they 
were  deprived  of  a  part  of  their  share  during  one  year, 
profits  were  so  increased  that  there  would  be  a  greater 
stimulus  to  save  ;  the  wage-fund  for  the  following  years 
would  thus  be  enlarged,  and  the  loss  to  the  laborers 
would  prove  only  temporary. 

To  find  the  average  rate  of  wages  in  any  community, 
according  to  this  theory,  it  was  only  necessary  to  divide 
its  total  wage-fund  by  the  number  of  the  laboring  popula- 
tion. The  general  rate  of  wages  as  thus  established  could 
not  be  effectively  raised  except  by  an  increase  of  the  wage- 
fund,  or  a  diminution  of  numbers.^  The  free  capital  oi 
wage-fund  constituted  the  source  of  the  demand  for  labor; 
the  laboring  population  represented  the  supply  ;  the  aver- 
age  rate  of  wages  was  fixed  by  the  ratio  between  the  two.' 

§  347.  The  wage-fund  theory,  at  any  rate  in  the  form 
in  which  it  is  presented  by  its  more  uncompromising 
advocates,  involves  several  unwarranted  assumptions. 

'  It  was  one  of  those  cases  where  the  supply  of  labor  was  synonymous  with 
the  stock,  because  the  laborer  without  capital  could  not  wait,  but  must  sell 
his  services  at  once.     Compare  §  94. 


THE    WAGE-FUND    THEORY  CRITICISED.  313 

If  we  accept  MacCulloch's  definition  of  capital  as  com- 
prising all  those  portions  of  the  products  of  industry  that 
may  be  directly  employed  either  to  support  human  exer- 
tion or  to  facilitate  production,  we  shall  find  that  the 
amount  of  real  wages  falls  very  far  short  of  what  the 
theory  requires.  Not  all  the  things  that  7nay  be  em- 
ployed for  this  purpose,  are  thus  employed.  A  part  is 
spent  in  charity,  A  part  gets  into  the  hands  of  criminal 
or  semi-criminal  classes,  who  convert  it  to  their  own  uses 
without  giving  society  any  return.  A  part  is  destroyed 
by  time  and  natural  decay  without  reaching  the  consumer 
at  all. 

Nor  does  the  amount  actually  used  as  capital  bear  any 
fixed  proportion  to  the  total  product  which  might  possibly 
be  thus  used.  The  proportion  wasted  is  by  no  means  con- 
stant. It  varies  from  place  to  place  and  from  year  to 
year.  The  ability  of  a  community  to  pay  high  wages 
seems  to  depend  more  upon  the  avoidance  of  waste  than 
upon  the  increase  of  accumulations.  Laborers  are  better 
off  where  there  is  a  small  surplus  effectively  utilized,  than 
where  there  is  a  large  surplus  ineffectively  utilized.  As 
Newcomb  well  expresses  it,  wages  are  a  flow  and  not  a 
fund.  They  are  a  quota  of  the  national  income  rather 
than  of  the  national  capital. 

§  349.  Contrast  the  conditions  affecting  wages  in  old 
and  new  countries.  The  old  countries  have  large  amounts 
of  capital ;  not  only  large  in  the  aggregate,  but  large  in 
proportion  to  the  number  of  laborers.  New  countries, 
settled  by  men  of  the  same  race,  have  relatively  small 
amounts  of  capital.  According  to  the  wage-fund  theory 
wages  should  be  high  in  the  old  country  and  low  in  the 
new.  But  the  facts  are  just  the  reverse.  It  is  the  new 
country,  with  small  capital,  that  has  the  high  wages.  Nor 
can  this  difference  be  explained,  as  Cairnes  ingeniously 
undertakes  to  explain  it,  by  saying  that  the  capital  of  the 
old  country  is  invested  in  machinery,  and  that  the  supply 


314  WAGES. 

of  products  constituting  the  wage-fund  available  for  the 
use  of  its  laborers  is  therefore  small.  Making  all  due 
allowance  for  the  large  amount  of  wealth  represented  by 
machinery,  it  still  remains  true  that  the  supply  of  unused 
and  disposable  products  in  an  old  country  is  much  larger 
in  proportion  to  its  population  than  is  the  case  in  a  newer 
one.  The  reason  for  the  difference  in  wages  must  be 
sought  chiefly  in  the  fact  of  the  superior  utilization  of  its 
small  stock  of  capital  by  the  new  country,  where  business 
is  active  and  idlers  are  few. 

We  find  the  same  point  illustrated  by  the  conditions 
which  prevail  at  the  close  of  a  war.  At  such  a  time  the 
supply  of  unconsumed  products  is  apt  to  be  small ;  but 
if  the  war  has  not  lasted  long  enough  to  destroy  the  spirit 
of  business  enterprise,  nor  been  so  disastrous  as  to  paralyze 
ambition,  wages  will  generally  be  high.  The  effort  to 
regain  lost  ground,  and  the  impossibility  of  supporting 
idlers,  cause  all  the  available  resources  to  be  used  in  such 
a  way  as  to  counterbalance  the  evil  to  the  laboring  classes 
which  would  otherwise  result  from  the  diminished  amount 
of  capital. 

This  point  is  even  more  conspicuously  illustrated  in  the 
course  of  a  commercial  crisis.  At  the  beginning  of  such  a 
crisis  there  is  a  large  stock  of  unsold  commodities  await- 
ing consumption.  Statistics  of  the  different  trades  will 
show  the  presence  of  all  the  conditions  which,  according 
to  the  wage-fund  theory,  should  promise  prosperity  to 
the  workmen  and  continuance  of  high  real  wages.  Yet 
somehow  the  very  amount  of  these  commodities  seems  to 
form  an  obstacle  to  their  utilization.  People  are  so  afraid 
to  continue  their  production  when  there  are  too  many  un- 
sold products  on  hand,  that  the  demand  for  labor  is  less- 
ened and  wages  fall.  A  few  years  later,  when  the  stocks 
of  goods  have  wasted  away  and  the  surplus  on  hand  is 
small,  a  revival  of  business,  stimulated  by  the  very  small- 
ness  of  visible  stocks  of  goods,  results  in  giving  the  laborer 


INDUSTRY  AND   CAPITAL.  315 

large  employment  and  a  large  share  in  the  product.  Under 
such  circumstances  it  may  happen  that  his  wages  are  not 
limited  by  the  amount  of  goods  left  over  from  past  periods 
of  production.  If  he  receives  large  money  payments,  and 
does  not  spend  all  of  the  money  thus  obtained  until  the 
next  period  of  production  has  become  so  far  advanced 
that  the  goods  produced  during  that  period  are  placed  at 
his  disposal,  he  can  actually  obtain  his  real  wages,  not  out 
of  past  accumulations,  but  out  of  current  products. 

§  350.  These  illustrations  are  enough  to  show  that  there 
is  a  fallacy  in  the  idea  that  industry  is  limited  by  capital. 
In  one  sense  of  the  word  "  limited,"  this  proposition  is 
measurably  true ;  for  the  amount  which  goes  to  the  sup- 
port of  the  laborers  cannot,  except  under  rare  conditions, 
exceed  the  unconsumed  surplus  from  previous  periods  of 
production.  But  as  the  word  is  commonly  understood, 
it  means  something  more  than  this.  If  we  say  that  one 
thing  is  limited  by  another  we  imply,  not  only  that  the 
first  cannot  exceed  the  second,  but  that  it  habitually 
comes  up  to  the  bounds  set  by  the  second.  If  we  say 
that  the  chance  of  aerial  navigation  is  limited  by  the 
height  of  the  atmosphere,  we  do  not  mean  that  a  balloon 
could  not  go  higher  than  the  atmosphere  does,  which  is  un- 
doubtedly true  ;  but  that  it  can  go  as  high  as  the  atmos- 
phere does,  which  is  undoubtedly  false.  If  we  say  that 
wages  are  limited  by  capital,  we  are  naturally  understood 
as  meaning  that  wages  go  as  high  as  the  amount  of 
accumulations  will  permit  ;  and  in  modern  industrial 
society  this  proposition  is  not  borne  out  by  the  facts.' 

'  The  wage-fund  theory  seems  to  involve  a  certain  confusion  between 
capital  as  a  mode  of  measurement  of  wealth  (§  5),  and  capital  as  a  mode  of 
use  of  wealth  (§§  7,  138).  If  we  look  at  MacCulloch's  view  that  the  wealth 
of  the  community  measured  as  capital  furnishes  an  indication  of  the  amount 
which  will  be  paid  in  wages,  we  are  justified  in  saying  that  the  proposition 
is  important  but  untrue.  If  we  look  at  Ricardo's  view,  that  it  is  the  amount 
of  wealth  used  as  capital  which  furnishes  the  indication  of  the  amount  of 
wages,  we  have  a  proposition  which  is  true,  but  relatively  unimportant.  The 


3l6  WAGES. 

§  351.  According  to  the  theory  which  is  held  by  most 
modern  economists,  wages  are  kept  up,  not  by  the  exist- 
ence of  a  fund  of  public  capital  which  must  necessarily  go 
to  the  laborer,  but  by  the  competition  of  a  number  of 
individual  capitalists,  which  reduces  profits  to  a  minimum 
and  compels  them  to  give  the  laborer  as  large  a  share  of 
his  product  as  is  consistent  with  the  continuance  of  indus- 
trial enterprise.  The  advocates  of  this  theory  claim  that 
there  is  such  activity  in  the  accumulation  of  capital  that 
competition  secures  to  the  laborer  the  chief  benefit  of 
modem  improvements,  and  forces  the  capitalist  to  con- 
tent himself  with  a  small  fraction  of  the  gain  instead  of 
the  lion's  share. 

The  piece-price  which  the  employer  can  afford  to  pay  in 
the  long  run,  is  the  price  of  the  product  less  the  interest 
on  the  capital  involved  in  its  production  ;  and  in  the  long 
run  he  is  also  compelled  to  pay  as  much  as  this.  For  if 
the  price  of  the  product  more  than  pays  wages  and  in- 
terest, new  competition  sets  in  which  drives  prices  down 
and  wages  up  ;  and  if,  on  the  other  hand,  the  price  of  the 
product  less  than  pays  wages  and  interest,  the  invested 

error  of  the  advocates  of  the  wage-fund  theory  consists  in  the  assumption 
that  the  logic  of  Ricardo  can  be  applied  to  the  concept  of  MacCuUoch. 
They  see  that  the  payment  of  wages  represents  an  investment  of  capital ; 
they  proceed  to  assume  that  the  amount  of  such  investment  will  bear  a  de- 
terminate proportion  to  the  total  amount  of  unconsumed  surplus  which  is 
physically  capable  of  investment.  But  the  two  things  are  totally  different ; 
nor  does  the  amount  of  the  one  bear  any  fixed  ratio  to  that  of  the  other. 

When  John  Stuart  Mill  defined  capital  as  including  whatever  things  are 
^^j/i«^</ to  supply  productive  labor  with  the  various  means  needed  for  the 
process  of  production,  and  thus  remitted  to  the  mind  of  the  employer  the 
determination  of  the  amount  of  the  wage-fund,  he  had  implicitly  aban- 
doned the  views  of  his  immediate  predecessors.  But  at  the  time  when  he 
wrote  his  "  Principles  of  Political  Economy,"  he  was  far  from  perceiving  the 
real  bearing  of  this  change  on  the  doctrine  of  wages.  It  was  not  until 
Longe  and  Thornton,  and  afterwards  Walker,  showed  how  conspicuously 
the  wage-fund  theory  failed  to  explain  the  facts  of  industry,  that  proper  im- 
portance was  given  to  the  anticipated  value  of  a  future  product  in  deter- 
mining the  share  of  the  past  product  of  industry  which  goes  to  the  laborers. 


THE  RESIDUAL    THEORY.  317 

capital  IS  allowed  to  wear  out  without  being  replaced 
until  prices  are  driven  up  and  wages  down.  Neither  of 
these  processes  is  under  modern  conditions  a  quick  one, 
but  both  are  sure  to  come  about  in  course  of  time.  It 
is  from  observation  of  these  facts  that  Walker  has  de- 
duced his  theory  that  wages  are  the  residual  share  of 
the  product  of  industry.  If  we  look  at  any  one  establish- 
ment, for  a  short  period,  this  statement  seems  palpably 
untrue ;  for  the  employer  pays  a  stipulated  sum  in  the 
form  of  wages,  and  takes  whatever  may  be  left.  But  if 
we  look  at  the  industry  as  a  whole,  and  at  the  course  of 
events  in  the  long  run,  we  find  much  to  confirm  General 
Walker's  view. 

§  352.  The  residual  theory  has  a  great  advantage  over 
its  two  predecessors,  in  explaining  accurately  the  facts  of 
modern  business.  It  shows,  as  the  popular  theory  cannot, 
why  wages  are  high  where  labor  is  efficient.  It  explains, 
as  the  wage-fund  theory  fails  to  do,  why  wages  are  high 
when  unconsumed  products  are  scarce.  It  makes  wages 
depend  on  a  flow  of  capital  instead  of  a  fund.  But  it  is 
not  quite  free  from  unwarranted  assumptions.  In  laying 
stress  on  the  competition  of  capitalists  with  one  another, 
it  seems  to  lose  sight  of  the  corresponding  competition 
among  laborers.  Increase  of  numbers  is  tending  to  drive 
wages  down  in  the  same  way  that  increase  of  capital  is 
tending  to  drive  profits  down.  To  be  sure,  the  cases  are 
not  quite  parallel  ;  for  a  reduction  in  the  rate  of  profit 
means  increased  demand  for  labor,  while  a  reduction  in 
the  rate  of  wages  means  diminished  demand  for  capital.' 

^  If  the  rate  of  profit  falls,  the  laborer  gets  more  nearly  the  whole  amount 
of  the  product.  But  if  the  rate  of  wages  falls  we  have  a  corresponding  fall 
in  prices  and  little  change  in  the  relative  shares  of  labor  and  capital. 

It  is  a  common  but  erroneous  assumption  that  if  general  wages  are  reduced 
profits  will  rise.  A  fall  in  real  wages,  the  methods  of  industry  remaining 
unchanged,  means  that  less  capital  need  be  advanced  in  productive  industry. 
Now  this  lessened  demand  for  capital  would  certainly  not  raise  the  rate  of 
profit — if  anything  it  would  probably  lower  it.     If  the  amount  of  invested 


3l8  WAGES. 

But  this  only  amounts  to  saying  that  while  part  of  the 
gain  from  low  profits  goes  to  the  laborer,  all  of  the  gain 
from  low  wages  goes  to  the  consumer.  It  is  the  con- 
sumer who  is  the  residual  claimant  in  the  results  of 
modern  industrial  improvements.  Inactive  competition 
on  the  part  of  any  large  group  of  producers  may  delay 
this  result ' ;  it  cannot  essentially  alter  it.  No  one  group 
of  producers  can  be  marked  as  a  residual  claimant  under 
the  modern  process  of  industrial  competition.  Most  of 
the  gain  from  any  improvement  in  production  ultimately 
goes  to  the  consumer,  whoever  he  may  be,  by  enabling 
him  to  get  his  products  cheaper. 

§  353.  Here  we  find  a  grain  of  truth  in  the  much 
despised  popular  theory.  It  is  the  possessors  of  ready 
money  that  derive  the  chief  advantage  from  improved 
efficiency  of  labor.  The  error  of  the  popular  view  of 
wages  is  not  in  its  assumption  that  increased  efficiency 
gives  its  main  benefit  to  the  buyers  of  products,  but  in 
the  assumption  that  those  buyers  are  necessarily  the  rich, 
the  holders  of  accumulated  wealth.  A  man's  power  of 
consumption  is  measured  by  the  income  he  receives  rather 
than  by  the  capital  which  he  owns.  If  his  labor  affords 
him  an  income  of  one  thousand  dollars  a  year  and  he 
spends  it  all,  he  never  obtains  any  accumulated  wealth, 
but  he  obtains  an  enormous  advantage  from  the  large 
amount  of  comforts  which  modern  industrial  processes 
have  placed  at  his  disposal.      The  gain  from  an  improve- 

capital  is  diminished  and  the  rate  of  profit  not  increased,  the  aggregate  of 
profit  falls  with  a  fall  in  wages,  and  the  whole  gain  goes  to  the  consumer. 

Of  course,  if  an  individual  employer  can  reduce  wages,  he  thereby 
increases  his  profits  ;  and  an  observation  of  this  fact  has  doubtless  been  the 
source  of  the  mistaken  belief  that  what  can  happen  in  each  particular  case 
can  happen  in  all  simultaneously. 

'  Cases  of  this  kind  have  given  rise  to  an  opinion,  frequently  expressed, 
that  the  benefit  of  improvements  goes  to  the  owners  of  the  productive  agent 
which  increases  most  slowly,  be  it  land,  labor,  or  capital.  This  seems  to  be 
a  much  more  sweeping  generalization  than  is  warranted  either  by  the  facts 
or  the  theoretical  proofs  which  have  be&n  adduced  to  support  it. 


V 

t 


LABORERS  AS  CONSUMERS.  319 

merit  goes  chiefly  to  those  who  consume  the  products 
cheapened  by  such  an  improvement  ;  and  these  may  be 
either  laborers  or  capitahsts.  The  study  of  distribution 
of  wealth  between  different  classes  resolves  itself  into  a 
study  of  the  consumption  of  wealth  by  different  classes. 
If  an  improvement  in  production  is  of  such  a  character  as 
to  cheapen  goods  used  by  capitalists,  and  not  to  affect 
those  used  by  laborers,  the  popular  theory  of  wages  is  the 
true  one.  The  gain  in  such  a  case  goes  entirely  to  the 
rich.  If,  on  the  other  hand,  the  improvement  is  such  as 
to  cheapen  products  used  by  the  laborer,  and  not  by  the 
capitalist,  the  gain  goes  entirely  to  the  laborer,  and  the 
wage-fund  theory  is  the  more  correct  one.  The  popular 
theory  tacitly  assumes  that  every  improvement  is  of  the 
former  class.  In  point  of  fact,  modern  improvements 
belong  chiefly  to   the  latter. 

§  354.  Let  us  look  at  this  matter  in  detail.  Suppose 
that  it  were  thus  possible  to  divide  goods  into  two  classes ; 
one  used  by  the  rich,  the  other  by  the  poor.  An  improve- 
ment in  the  production  of  goods  consumed  by  the  rich 
would  cheapen  the  price  of  such  goods  and  enable  the 
rich  to  get  more  for  their  money.  This  would  be  the 
only  efTect.  It  would  not  increase  the  amount  of  real 
capital  available  for  the  support  of  labor,  except  in  a  very 
slight  degree,  by  an  indirect  process  of  redistribution  of 
producers  in  different  employments.  The  surplus  avail- 
able for  laborers  would  probably  remain  unchanged.  The 
activity  of  capital  in  giving  employment  to  labor  would 
find  itself  restricted  witKin  narrow  limits. 

Suppose,  on  the  other  hand,  that  the  increase  is  con- 
fined to  things  which  laborers  use.  Under  such  a  con- 
dition the  rich  would  find  themselves  practically  compelled 
to  reinvest  the  whole  surplus.  They  would  have  no 
use  for  the  increased  production.  They  would  be  forced 
to  convert  it  into  capital.  The  benefit  of  the  surplus 
would  accrue  to  the  laborers  in  the  form  of  a  direct  and 


320  WAGES. 

iinniediate  increase  of  real  wages.  Barring  losses  from 
waste,  and  from  the  consumption  of  this  increased  pro- 
duct by  idlers  instead  of  laborers,  the  wage-fund  theory 
in  a  case  like  this  would  be  substantially  the  true 
one. 

What  we  actually  see  is  something  intermediate  between 
these  two  cases,  but  nearer  the  second  than  the  first.  Im- 
proved methods  have  not  cheapened  the  products  which 
are  used  by  the  rich  exclusively.  Champagne  and  yachts 
and  race  horses  are  as  costly  as  ever.  They  cheapen  pro- 
ducts which  are  used  by  poor  as  well  as  rich.  Nearly  all 
the  large  improvements  in  modern  industry  have  de- 
pended for  their  success  upon  the  creation  of  a  wide 
market  (§  179),  appealing  not  only  to  those  who  have 
accumulated  large  fortunes,  but  to  those  who  live  more 
or  less  prosperously  on  the  results  of  their  labor.  Under 
these  circumstances  we  find  an  active  competition,  both 
for  the  services  of  the  laborer  as  a  producer  and  for  the 
money  of  the  laborer  as  a  consumer  ;  especially  the  latter. 
The  laborer  is  the  residual  claimant  in  modern  industry, 
not  solely  nor  chiefly  on  account  of  his  profit  in  the  in- 
crease of  production,  but  on  account  of  his  profit  in  the 
increase  of  consumption. 

§  355.  If  the  effect  of  increased  efificiency  in  produc- 
tion is  to  enlarge  the  amount  of  products  available  to 
the  laborer  as  a  consumer,  the  question  at  once  arises, 
what  he  will  do  with  the  surplus.  Four  possibilities  are 
open  to  any  group  of  laborers  : 

1.  They  may  increase  their  numbers,  making  the  aver- 
age size  of  their  families  larger. 

2.  They  may  shorten  their  hours  of  labor. 

3.  They  may  enlarge  their  consumption  of  the  products 
of  other  laborers. 

4.  They  may  save  money ;  that  is,  they  may  waive  the 
enjoyment  of  a  part  of  their  income  and  put  it  at  the 
disposal  of  other  members  of  the  community,   for   the 


ALTERNATIVES  OPEN   TO  LABOR.  32 1 

sake  of  a  future  return  which  they  anticipate  from  such 
present  abstinence. 

The  choice  between  these  alternatives  depends  largely 
upon  the  character  of  the  laborer  himself. 

If  he  is  influenced  by  the  force  of  custom,  and  is  not  in 
the  habit  of  reasoning  at  all,  he  will  unconsciously  choose 
the  first  alternative,  supporting  an  increased  family  in  the 
old  standard  of  comfort  and  bringing  up  a  number  of 
children  who  in  the  next  generation  will  increase  the  in- 
tensity of  competition  of  laborers  with  one  another. 

If  he  pursues  short-sighted  lines  of  reasoning,  he  will 
take  advantage  of  the  improvement  to  lessen  his  hours  of 
labor,  being  able  to  obtain  the  old  amount  of  comfort  with 
less  expenditure  of  efl"ort.  Whether  this  change  is  a  gain 
or  a  loss  to  the  community  will  depend  largely  on  the  way 
in  which  he  uses  his  leisure.  If  the  time  is  spent  in  loaf- 
ing, with  its  habitual  concomitants,  it  will  be  a  loss  ;  if  it 
is  spent  in  rational  enjoyment,  it  will  pave  the  way  for  the 
third  alternative  of  diversified  consumption,  and  will  be 
a  means  of  real  gain  to  the  individual  and  progress  to  the 
community  as  a  whole. 

If  he  is  in  the  habit  of  far-sighted  reasoning,  he  will 
choose  either  the  third  or  the  fourth  alternative.  Redu- 
cing his  labor  very  little,  and  making  up  by  increased 
speed  for  any  slight  reduction  in  hours,  the  far-sighted  man 
will  take  the  fullest  advantage  of  his  gain  as  a  consumer 
and  will  utilize  the  change  to  secure  more  enjoyment, 
either  present  or  future,  rather  than  to  do  less  work. 
He  will  not  increase  his  family  or  diminish  his  output, 
but  will  increase  his  comfort  for  the  present  and  his  pro- 
vision for  the  future.  * 

§  356.  These  differences  may  be  illustrated  mathemati- 
cally as  follows  : 

On  the  line  (^JT  (Fig.  10)  lay  off  equal  parts  represent- 
ing units  of  time  of  labor — say  hours  of  work  per  day. 
At  each  of  these  points  draw  a  line  parallel  to  OY,  repre- 


322 


WAGES. 


senting   the   intensity   of   enjoyment   derived    from    the 
results  of  the  labor  of  that  hour ;    or,  what  is  substan. 


tially  the  same  thing,  the  sacrifice  which  would  be  involved 
in  going  without  them.  As  the  number  of  hours  increases, 
the  intensity  of  enjoyment  tends  to  diminish.  The  first 
hours  represent  the  difference  between  death  and  life, 
and  their  product  may  be  said  to  have  infinite  *  utility. 
Longer  hours  mean  an  increase  in  the  total  comfort 
available  ;  but  this  increment  becomes  less  marked  as 
the  working  day  grows  longer.  If  we  connect  the  ex- 
tremes of  these  lines  measuring  satisfaction,  we  obtain 
a  curve  whose  height  at  any  point  represents  the  de- 
gree of  enjoyment  secured  by  the  last  unit  of  labor  time, 
while  the  total  area  between  the  curve  and  the  two  axes 
represents  the  total  enjoyment  which  the  individual  ob- 
tains by  his  work. 

If  we  represent  the  pain  of  successive  hours  of  labor  in 
like  manner,  by  lines  drawn  downward  from  OX,  we  can 
construct  a  similar  curve,  below  the  axis,  representing  the 

'  Patten  uses  the  term  "  absolute"  instead  of  "infinite,"  which  is  per- 
fectly pfroper  ;  but  he  measures  it  by  zero  instead  of  infinity,  which  hardly 
seems  right.  For  the  thing  which  is  barely  distinguishable  from  a  necessity 
involves  a  very  great  sacrifice,  when  people  are  forced  to  give  it  up,  not  a 
very  small  one,  and  thus  approximates  to  infinity  instead  of  to  zero. 


T 

■4' 


BALANCE   OF  PLEASURE  AND   PAIN.  323 

sacrifices,  direct  and  indirect  *  which  the  laborer  undergoes. 
These  sacrifices  during  the  early  hours  will  be  compara- 
tively slight ;  there  may  even  be,  as  Jevons  suggests,  a 
balance  of  pleasure  in  working  rather  than  in  not  working, 
in  which  case  the  curve  of  labor  will  rise  above  the  axis. 
But,  as  the  hours  increase,  the  pain  and  sacrifice  also  in- 
crease. The  laborer  who  exercises  free  judgment  will  go 
on  working  until  the  (diminishing)  increment  of  satisfac- 
tion from  the  product  just  balances  the  increasing  pain 
and  sacrifice  from  the  labor.  At  that  point  he  will  stop. 
In  the  illustration  given,  this  condition  of  things  comes 
into  play  at  the  end  of  the  ninth  hour.  Everything 
before  that  gives  a  balance  of  satisfaction  over  pain  and 
sacrifice.  Everything  after  that  gives  a  balance  in  the 
other  direction. 

§  357-  What  will  be  the  effect  on  this  balance,  if  the 
laborer,  either  through  his  own  increase  of  efficiency  or 
through  the  cheapening  of  the  products  of  others,  is  able 
to  get  more  products  and  services  for  a  given  duration  of 
labor?  Will  the  enlarged  quantity  of  possible  return  for 
the  tenth  hour's  work  serve  as  a  stimulus  to  make  him  in- 
crease his  time  ?  Or  will  the  larger  product  which  he  has 
obtained  from  earlier  hours  so  appease  the  intensity  of  his 
desires  that  he  will  stop  at  the  eighth  or  seventh  hour  ? 
Which  will  prove  the  stronger  force,  the  increase  of  the 
amount  to  be  obtained,  which  makes  additional  labor  seem 
more  remunerative,  or  the  increased  amount  of  comfort 
already  in  his  possession,  which  makes  it  seem  less  so  ? 

The  answer  to  this  question  will  depend  largely  upon 
the  kind  of  use  which  he  makes  of  his  wages.  Assume 
that  a  laborer  spends  part  of  his  earnings  for  food,  part 
for  comforts,  part  for  luxuries,  and  part  for  social  advance- 

'  Direct  sacrifice  means  pain  ;  indirect  means  loss  of  pleasure.  Patten 
has  developed  some  of  the  bearings  of  the  difference  between  the  two  in 
an  interesting  manner  ;  but  in  our  elementary  treatment  of  the  subject  it 
seems  hardly  worth  while  to  distinguish  them. 


324  WAGES. 

ment.  While  Weber's  law,  that  increased  consumption 
is  attended  with  diminished  satisfaction  (§  92),  perhaps 
applies  in  some  measure  to  all  of  these  things,  the  rapid- 
ity of  the  diminution  is  very  different  in  the  four  cases. 
It  is  most  marked  in  connection  with  food.  Hunger  is 
the  most  exacting  of  wants;  but  when  hunger  is  satisfied, 
■the  enjoyment  connected  with  additional  expenditures  for 
eating  rapidly  diminishes,  and  the  point  of  satiety  may 
soon  be  reached.  In  the  case  of  comforts  like  clothing, 
fuel,  or  shelter,  the  first  want  is  not  so  imperative  as  that 
of  hunger ;  but  the  utility  of  added  supplies  of  these  things 
does  not  diminish  so  rapidly  as  in  the  case  of  food. 
While  two  suits  of  clothes  do  not  represent  twice  as  much 
utility  to  the  wearer  as  one  suit  of  clothes,  the  gain  in 
enjoyment  from  their  possession  is  relatively  greater  than 
that  which  results  from  eating  double  the  accustomed 
number  of  meals.  In  the  case  of  luxuries  the  first  neces- 
sity is  much  less  than  that  for  food  or  clothing ;  but  when 
people  have  once  begun  to  spend  money  on  luxuries  they 
can  go  on  for  a  long  time  before  they  find  themselves 
even  approximately  satiated.  Expenditures  for  social 
advancement  are  not  a  necessity  at  all,  but  they  are 
accompanied  with  almost  undiminished  enjoyment  as 
their  amount  increases. 

§  358.  Suppose  that  a  laborer  under  old  conditions, 
working  nine  hours  a  day,  spends  the  product  of  five 
hours'  labor  on  food,  that  of  three  hours'  labor  on  com- 
forts, and  that  of  one  hour's  labor  on  luxuries ;  and  that 
by  some  industrial  change  his  purchasing  power  in  all 
these  lines  is  doubled.  What  will  happen  ?  He  will 
quite  certainly  reduce  the  time  devoted  to  the  produc- 
tion of  means  of  purchasing  food.  He  can  get  more  food 
by  three  hours'  labor  than  he  previously  got  by  five  ;  and 
this  so  far  satisfies  his  hunger  that  the  promise  of  in- 
creased supplies  from  the  fourth  and  fifth  hour  does  not 
constitute  a  motive  to  work  for  that  purpose.     The  time 


ENGEL'S  LA  W.  325 

devoted  to  the  acquisition  of  comforts  is  not  so  certain  to 
diminish.  Not  improbably  it  will  remain  nearly  station- 
ary. If  he  continues  to  work  three  hours  for  fuel,  cloth- 
ing, and  house-rent,  it  will  show  that  as  the  amount  of 
these  things  has  doubled,  the  intensity  of  enjoyment  from 
additional  supplies  has  halved — a  probable  enough  result. 
The  labor-time  devoted  to  securing  luxuries  is  likely  to 
increase,  because  the  increased  amount  of  commodities 
which  he  can  buy  gives  a  large  enjoyment  with  which  the 
possession  of  other  luxuries  hardly  interferes.  What  is 
true  of  luxuries  is  even  more  conspicuously  true  of  means 
of  social  advancement.  The  more  of  these  a  man  can  get 
for  any  given  time  of  labor,  the  more  will  he  try  to  secure 
them  independently  of  the  amount  he  already  possesses. 
We  are  thus  likely  to  see  a  redistribution  of  hours  some- 
what as  follows : 

Old  Conditions.  New  Conditions. 

Food 5  3 

Comforts 3  3 

Luxuries I  2 

Ambitions o  I 

§  359.  This  is  not  mere  theory.  It  is  verified  by  two 
independent  lines  of  observation  : 

1.  The  Prussian  statistician,  Dr.  Engel,  has  developed 
the  fact  that  the  greater  the  wages  a  group  of  laborers  re- 
ceives, the  smaller  will  be  the  percentage  of  those  wages 
which  is  spent  for  food.  This  generalization,  known  as 
Engel's  Law,  has  been  confirmed  by  investigations  in  a 
great  many  different  countries,  and  has  been  supplemented 
by  observation  as  to  other  groups  of  expenditure  corre- 
sponding to  the  view  just  stated. 

2.  It  has  also  been  noted  that  an  increase  in  the  volume 
of  food  products,  while  population  remains  unchanged, 
produces  a  fall  in  price  more  than  corresponding  to  the 
increase  of  supply,  so  that  the  aggregate  payment  for  such 
products  by  the  consumers  tends  to  diminish.     This  in- 


326  WAGES. 

dicates  that  consumers,  when  they  can  get  a  larger  amount 
of  food  for  the  same  amount  of  labor,  tend  to  reduce  the 
hours  devoted  to  the  work  of  securing  food  supplies.  On 
the  other  hand,  in  most  manufactured  articles,  which 
are  matters  of  comfort  or  luxury,  an  increase  in  quantity 
produced  is  accompanied  by  a  fall  in  price  less  than  cor- 
responding to  the  increase  in  supply,  so  that  the  aggre- 
gate payment  for  such  products  by  the  consumer  tends  to 
increase.  This  shows  that  consumers,  when  they  are  en- 
abled to  get  a  larger  amount  of  manufactured  products 
for  the  same  amount  of  labor,  so  increase  their  consump- 
tion as  to  devote  more  labor  instead  of  less  to  procuring 
things  of  this  kind. 

This  result  is  even  more  conspicuously  seen  when  we 
come  to  luxuries  like  travel.  A  moderate  reduction  in 
price  has  been  sufficient  to  cause  a  great  increase  in  the 
use  of  transportation  agencies,  and  to  make  the  total 
amount  paid  for  their  services  much  larger  than  it  was  a 
few  years  ago.  When  the  invention  of  the  railroad  en- 
abled one  man  to  do  work  which  formerly  required  a 
hundred  or  a  thousand  hands,  it  was  supposed  that  the 
demand  for  labor  in  moving  goods  and  passengers  would 
be  greatly  diminished.  But  the  railroad  system  employs 
far  more  laborers  in  proportion  to  the  population  than 
were  employed  on  roads  in  the  old  days  ;  and  this  proves 
that  the  people  as  a  whole  spends  a  larger  part  of  its 
income  for  transportation  at  low  rates  than  it  ever  did  at 
high  rates.' 

'  These  conditions  are  illustrated  in  the  differing  forms  of  the  demand 
curve  (§  91)  for  different  articles.  In  the  case  of  necessities,  or  things 
which  are  regarded  as  necessities,  a  change  in  price  is  accompanied  by  less 
than  the  proportionate  change  in.  quantity  consumed.  The  demand  curve 
in  these  cases  approaches  more  nearly  to  a  horizontal  line.  Especially  is 
this  true  of  an  article  like  tobacco,  so  distinct  from  others  in  its  character 
that  nothing  else  can  be  substituted  for  it.  On  the  other  hand,  with  things 
which  are  not  popularly  regarded  as  necessities,  a  change  in  price  is  accom- 
panied by  a  more  than  proportionate  change  in  quantity  demanded,  and 


REDUCTION  OF  HOURS.  327 

§  360.  We  have  thus  far  assumed  the  hours  of  labor  to 
remain  unchanged  while  the  use  made  of  the  earnings  of 
those  hours  was  redistributed.  But  it  will  generally  hap- 
pen that  any  increase  of  real  wages,  like  that  which  has 
been  described,  is  attended  with  some  reduction  in  the 
hours  of  labor. 

There  are  two  different  causes,  operating  on  different 
classes  of  laborers,  which  combine  to  produce  this  effect. 
The  low-grade  laborer  who  cares  much  for  food  and  drink 
and  comparatively  little  for  other  things,  when  he  finds 
himself  able  to  get  his  accustomed  living  in  fewer  hours 
is  strongly  tempted  to  reduce  his  working  time ;  or  if  he 
continues  to  work  as  many  hours  as  before,  he  reduces 
speed  in  such  a  way  as  to  have  virtually  the  same  effect 
on  the  industrial  community.  Until  his  consumption  has 
become  diversified  and  his  ambition  developed,  the  mo- 
tives for  reducing  his  labor  are  stronger  than  those  for 
increasing  his  earnings.  On  the  other  hand,  the  high- 
grade  laborer,  though  anxious  to  increase  his  consump- 
tion, finds  that  time  is  necessary  for  the  enjoyment  of  the 
new  opportunities  of  diversified  consumption  which  pro- 
gress has  placed  within  his  reach.  The  long  hours  of 
labor  interfere  with  the  enjoyment  of  the  results  of  that 
labor.  He  sets  a  limit  to  his  working  day,  not  so  much 
on  account  of  the  direct  pain  of  labor  as  on  account  of  the 
indirect  sacrifices  connected  with  its  long  continuance. 
He  may  try  to  combine  both  the  means  and  the  oppor- 
tunity for  enjoyment  by  reducing  hours  and  increasing  his 
speed — in  which  case  the  reduction  of  the  working  day  is 
more  apparent  than  real. 

§  361.  But  will  not  the  progress  of  those  who  wish  to 
shorten  their  hours  or  increase  their  enjoyments  be  de- 

the  demand  curve  approaches  more  nearly  to  the  vertical  line.  At  high 
prices  the  demand  will  be  trifling ;  at  low  prices  it  will  be  many  times 
greater.  Commodities  of  this  kind  are  said  to  h&  sensitive  j  those  of  the 
former  class  are  said  to  be  insensitive. 


328  WAGES. 

feated  by  the  less  intelligent  laborers,  who  go  on  irration- 
ally increasing  their  numbers  ?  Will  not  the  whole  vantage 
ground  be  lost  in  the  next  generation,  when  a  larger  popu- 
lation is  competing  for  a  limited  supply  of  food  products 
and  disregarding  opportunities  for  diversified  enjoyment? 
Is  not  the  gain  to  the  laboring  classes  in  its  nature  a  tem- 
porary one,  which  will  be  destroyed  by  increase  of  num- 
bers on  the  part  of  the  less  intelligent  members  of  the 
class?  In  some  lines  of  production  it  will.  In  these  lines 
the  competitive  system  results  in  having  our  work  done  by 
a  large  number  of  low-grade  laborers,  instead  of  by  a  rela- 
tively small  number  of  high-grade  laborers.  The  ready- 
made  clothing  trade  in  our  cities  furnishes  perhaps  the 
most  conspicuous  instance.  It  is  served  by  people  who 
are  underpaid,  underfed,  and  undersupplied  with  every- 
thing which  contributes  to  civilized  life.  The  effort  to 
realize  economy  of  production  has  in  such  cases  led  to  the 
employment  of  cheap  labor  in  the  bad  sense — of  labor 
which  is  cheap  because  it  does  little,  and  which  receives 
correspondingly  little. 

§  362.  But  while  low  grade  labor  is  the  cheapest  labor 
in  some  employments,  it  is  not  cheap  in  others.  To  en- 
able a  man  to  do  hard  work  he  must  be  reasonably  well 
fed.  The  economy  of  increased  power  overbalances  any 
apparent  loss  from  increased  consumption.  Even  where 
work  requires  physical  strength  only,  the  man  who  re- 
ceives low  wages  per  day  is  so  much  less  efficient  that 
his  labor  may  be  very  costly  per  unit  of  product.  In  em- 
ployments which  require  mental  ability  as  well  as  physical 
strength,  the  inadequacy  of  the  so-called  cheap  labor,  and 
its  real  dearness  when  measured  on  the  basis  of  work 
done,  becomes  even  more  conspicuously  apparent.  The 
brain  worker,  to  do  his  work  properly,  must  have  not 
merely  the  necessary  amount  of  food  and  shelter  and 
fuel,  but  the  necessary  amount  of  comfort  and  travel  and 


ECONOMY  OF  CONSUMPTION.  329 

education  to  keep  the  brain  in  working  order.'  A  surgeon 
or  a  lawyer  who  earns  only  one  dollar  a  day  is  a  very  bad 
man  to  employ.  The  cheap  laborer  cannot  compete  with 
the  dear  laborer  in  lines  requiring  special  strength  or 
special  skill. 

§  363.  Different  men  require  different  feeding;  differ- 
ent trades  require  different  men.  If  we  go  into  a  machine 
shop  where  many  steam-engines  are  built,  we  find  some 
large  ones  and  some  small  ones.  The  small  ones  burn 
little  fuel,  but  they  also  furnish  very  little  power.  The 
large  ones  burn  ten  or  one  hundred  times  the  amount 
of  fuel,  and  require  correspondingly  greater  care  and  ex- 
penditure in  every  direction ;  but  the  difference  in  work 
done  by  large  engines  is  such  that,  in  those  lines  where 
they  can  be  used,  the  apparent  waste  represents  a  true 
economy.  So  it  is  in  the  diversified  industries  of  modern 
life.  There  are  some  men  whose  maximum  efficiency  per 
unit  of  food  is  obtained  with  small  consumption  and 
small  output.  These  go  into  the  lines  requiring  neither 
exceptional  strength  nor  exceptional  skill,  and  remain 
poor  because  the  best  commercial  economy  in  such  lines 
is  obtained  by  a  combination  of  low  output  and  low 
consumption.  There  are  others  who  requine  for  their 
maximum  efficiency  a  greater  amount  of  food  and  a  con- 
siderable diversity  of  enjoyment.  These  go  into  lines 
where  the  maximum  efficiency  is  obtained  by  moderate 
but  not  immoderate  consumption.  Finally,  we  have  a 
smaller  number  of  men  in  yet  higher  walks  of  industry, 
whose  economy  is  like  that  of  the  engines  of  the  Lucania  ; 
whose  power  can  be  obtained  only  by  an  enormous  con- 
sumption of  the  products  of  others,  past  and  present,  but 

'  A  large  manufacturing  concern,  within  the  author's  knowledge,  offered 
to  defray  half  the  expenses  of  a  visit  to  the  Chicago  Exposition  for  any  of 
its  foremen  who  would  make  the  trip,  believing  that  the  increased  value  of 
their  services  to  the  concern  would  make  the  investment  a  paying  one. 


330  WAGES. 

is,  if  properly  directed,  capable  of  rendering  services  more 
than  proportionate  to  this  consumption. 

§  364.  It  is  in  this  differentiation  of  employment  that 
we  are  to  seek  the  cause  of  poverty.  People  will  have 
small  earnings  per  day  if  they  are  so  constituted  that 
their  maximum  service  in  the  community  is  obtained 
under  conditions  analogous  to  those  of  the  small  steam- 
engine.  The  multiplication  of  numbers  which  is  charac- 
teristic of  laborers  of  this  grade  drives  the  price  of  their 
services  so  low  that  it  becomes  impossible  for  men  with  a 
higher  standard  of  living  to  compete  with  them  in  doing 
work  which  requires  no  special  qualifications,  either  physi- 
cal or  mental.  The  high-grade  man  who  competes  with 
an  increasing  number  of  low-grade  men  finds  himself 
forced  to  the  alternative  of  rising  or  dying.  The  compe- 
tition of  those  who  multiply  their  numbers  instead  of 
shortening  their  hours  or  diversifying  their  consumption, 
drives  the  higher  class  of  laborers  out  of  some  things  and 
up  into  others.  The  men  thus  driven  out  cannot  always, 
maintain  themselves  in  any  higher  grade  of  employment, 
and  from  this  fact  there  results  a  great  deal  of  hardship 
to  those  upon  whom  the  changed  conditions  come  when 
they  are  advanced  in  years ;  but,  on  the  whole,  a  sur- 
prisingly large  number  of  the  workmen  who  appear  to 
suffer  most  from  the  competition  of  cheap  labor  are 
forced  upward  in  spite  of  themselves, — forced  to  do  a 
higher  grade  of  work  and  to  become  richer  and  stronger 
than  they  could  have  hoped  to  be  under  the  old  condi- 
tions. The  day-laborers  in  the  United  States  have  always 
feared  and  tried  to  obstruct  the  immigration  of  men  whose 
habits  of  living  were  lower  than  their  own,  and  whose  in- 
flux would  apparently  take  the  bread  out  of  the  mouths 
of  those  who  had  previously  done  the  cheapest  grades  of 
work.  But  there  can  be  no  doubt  that  the  successive 
waves  of  immigration  have  improved  rather  than  debased 
the  condition  of  those  with  whom  they  came  into  compe- 


INDUSTRIAL    GROUPS.  33 1 

tition.  The  Irishman  in  1830  forced  the  American  up: 
the  Itah'an  and  the  Canadian  have  forced  the  Irishman 
up.  The  cheapening  of  the  lowest  grade  of  product, 
while  it  has  operated  as  a  disadvantage  to  those  who 
compete  in  producing  it,  has  served  as  an  advantage  to 
every  consumer,  and  has  made  all  those  in  the  higher 
industrial  groups  better  off  from  being  relieved  from  the 
necessity  of  doing  the  work  which  could  more  economi- 
cally be  done  by  cheap  labor  and  poor  men. 

Each  group  of  laborers  contributes  to  the  supply  of 
one  particular  kind  of  goods  or  services,  and  to  the  de- 
mand for  goods  and  services  of  many  other  kinds.  Every 
laborer  who  adds  himself  to  one  of  these  groups  increases 
the  supply  and  lowers  the  price  in  the  line  which  he 
chooses.  The  greater  the  number  of  misn  in  a  group,  the 
smaller  will  be  the  price  of  their  services,  and  the  larger 
the  amounts  which  they  have  to  pay  for  services  rendered 
by  men  in  other  groups.  An  addition  to  the  numbers  of 
any  given  group  makes  life  harder  for  those  within  its 
pale  and  easier  for  those  without  it. 

§  365.  Many  men  find  themselves  bound  to  a  certain 
group  by  a  custom  or  habit  which  they  cannot  override, 
or  by  special  tastes  which  are  the  result  of  such  habit. 
Others  are  free  to  choose  their  line  of  work  as  they  please. 
With  some  reservations,  they  will  choose  the  line  where 
they  think  they  can  make  the  most  money  per  year.  A 
man  of  given  physical  and  mental  traits  will  try  to  adopt 
the  business  where  those  traits  are  most  efficient — where 
the  value  due  to  their  possession  outweighs  the  cost  of 
their  maintenance.  But  if  too  many  men  go  into  the 
same  group,  some  must  go  to  the  wall.  If  a  profession  is 
overcrowded,  this  fact  reduces  the  amount  which  its  mem- 
bers can  earn,  until  there  comes  a  time  when  some  are 
forced  into  other  trades  where  there  is  no  such  over- 
crowding. The  differences  of  wages  in  different  employ- 
ments are  not  due  to  differences  in  the  pleasure  or  pain 


332  WAGES. 

in  the  work,  except  so  far  as  this  pleasure  or  pain  in- 
creases  or  diminishes  the  number  of  those  who  enter  the 
field.  They  are  due  to  the  reciprocal  demand  of  different 
groups  for  one  another's  products  or  services.*  The  rela- 
tive prices  paid  for  the  products  of  different  groups  must 
be  such  as  to  secure  a  grade  of  workers  within  each  group 
which  can  give  the  required  product  at  the  minimum  of 
waste  to  society. 

§  366.  While  the  characteristics  of  each  individual  are 
the  chief  factor  in  determining  to  which  of  these  groups 
he  shall  belong,  there  are  always  some  producers  who 
stand  on  the  verge  between  a  lower  and  a  higher  group, 
and  who  are  drafted  to  the  one  or  the  other  by  slight 
changes  in  the  public  demand.  If  the  majority  of  men 
and  women  throughout  the  community  are  intelligent  in 
their  consumption,  spending  a  relatively  small  proportion 
of  their  money  for  the  bare  necessaries  of  life  and  a  large 
proportion  for  comforts  and  enjoyments,  of  higher  as 
well  as  lower  grades,  we  can  have  a  large  number  of  pro- 
ducers engaged  in  furnishing  these  enjoyments  without 
driving  their  remuneration  below  the  necessary  minimum. 
In  this  way  the  education  of  the  community  in  diversified 
consumption  becomes  of  the  highest  importance  to  all 
classes  in  society.  The  qualities  of  an  individual  man 
will  determine  to  a  great  extent  whether  he  is  to  be  rich 
or  poor;  but  the  general  standard  of  consumption  of  the 

*  Down  to  the  time  of  Mill  it  was  generally  said  that  the  price  of  articles 
tended  to  conform  to  their  labor  cost.  Mill  showed  that  in  international 
trade  this  process  was  reversed  ;  that  the  remuneration  of  the  producers  of 
goods  for  the  export  trade  of  different  nations  was  determined  by  their 
"reciprocal  demand  "  for  one  another's  products.  Cairnes  extended  this 
theory  of  reciprocal  demand  to  explain  the  relative  remuneration  of  men  of 
different  social  antecedents — "  non-competing  groups."  About  1870  Wal- 
ras,  Jevons,  and  Menger,  working  almost  simultaneously  and  quite  inde- 
pendently, showed  that  what  Mill  had  treated  as  an  exception  was  really  a 
rule.  "I  hold  labor  to  be  essentially  variable,"  says  Jevons,  "so  that  its 
value  must  be  determined  by  the  value  of  the  produce,  not  the  value  of  the 
produce  by  that  of  the  lator." 


EFFECTS  OF  LUXURY.  333 

community  will  be  the  dominant  factor  in  determining 
how  large  a  proportion  of  the  community  shall  be  rich  or 
poor.  If  the  bulk  of  the  people  live  on  the  minimum  of 
cheap  food,  multiply  or  at  any  rate  maintain  their  numbers 
as  long  as  such  cheap  food  is  forthcoming,  and  spend  com- 
paratively little  for  comforts  and  luxuries,  we  shall  find  that 
most  of  the  labor  of  such  a  community  is  employed  in  ob- 
taining subsistence  for  the  masses.  Under  such  circum- 
stances the  proportion  of  low  grade  labor  will  probably  be 
very  great.  If,  however,  a  large  part  of  the  community 
has  been  educated  to  demand  something  besides  cheap 
food  and  to  exercise  self-restraint  in  the  multiplication  of 
numbers  until  it  is  possible  to  provide  a  high  standard  of 
comfort,  we  shall  have  a  relatively  smaller  demand  for 
food  and  a  relatively  larger  demand  for  those  comforts 
and  luxuries  which  are  the  product  of  higher  intelligence 
and  require  a  higher  rate  of  pay  in  order  to  enable  the 
producer  to  furnish  them  to  advantage.  In  this  way,  any 
increase  in  intelligence  of  consumption  on  the  part  of  the 
masses  increases  the  average  rate  of  real  wages,  by  making 
it  possible  for  a  larger  proportion  of  the  producers  to  live 
in  employments  where  the  conditions  of  economical  pro- 
duction are  favorable  to  comfort,  education,  and  wealth, 
rather  than  to  poverty  and  numerical  increase. 

§  367.  This  must  not  be  understood  as  involving  indis- 
criminate commendation  of  luxury.  If  luxury  lays  many 
men  and  many  things  under  contribution  for  the  enjoy- 
ment of  one  man  only,  it  is  bad  for  the  community.  If  it 
leads  one  man  to  monopolize  the  product  of  a  larger 
amount  of  land  than  is  necessary  for  his  own  support,  it 
prevents  others  from  getting  food.  If  it  causes  an  un- 
necessary amount  of  labor  to  be  spent  for  one  man's 
enjoyment,  it  prevents  the  labor  from  furnishing  means 
of  enjoyment  to  many  others.  If,  as  frequently  happens, 
the  product  of  this  labor  harms  the  efficiency  of  the  man 
who  enjoys  it,  it  involves  an  additional  source  of  weak- 


334  Pf^AGES. 

ness  to  the  community.  We  have  seen  the  fallacy  of 
the  attempt  to  excuse  such  luxury  on  the  pretext  that  it 
gives  employment  to  labor.  But  in  their  well-grounded 
protest  against  selfish  excesses  of  luxury,  and  against  the 
excuses  made  to  palliate  them,  some  economists  have 
gone  too  far  in  discountenancing  all  unnecessary  expendi- 
ture for  personal  comfort.  "  The  Puritans  objected  to 
bear-baiting,  not  because  it  gave  pain  to  the  bear,  but  be- 
cause it  gave  pleasure  to  the  spectators."  This  judgment 
is  as  unwarranted  as  the  other.  The  intellectual  progress 
connected  with  using  things  that  are  not  necessary  is  quite 
as  important  to  the  community  as  the  industrial  progress 
connected  with  producing  things  that  are.  The  distinc- 
tion between  productive  and  unproductive  consumption  is 
often  drawn  in  such  a  way  as  to  emphasize  purely  mate- 
rial advances  and  ignore  other  things  which  are  quite 
as  essential.  The  lack  of  intelligent  enjoyment,  in  the 
Anglo-Saxon  race  at  any  rate,  involves  more  pressing 
danger  than  the  lack  of  readiness  to  save  capital.  If  a 
man  spends  his  money  for  luxuries  which  do  no  harm, 
and  whose  production  does  not  involve  a  waste  of  land  or 
labor  disproportionate  to  the  enjoyment  which  they  fur- 
nish to  him  and  to  others,  he  is  presumably  helping  rather 
than  hindering  the  progress  of  the  community  at  large. 

§  368.  There  are  many  schemes  of  social  reform,  whose 
promoters  expect  to  lessen  poverty  by  increasing  the 
laborers'  intelligence  in  production,  but  whose  actual 
promise  of  good  to  society  is  far  more  dependent  upon 
their  influence  on  intelligence  in  consumption.  Popular 
education  may  serve  as  a  type.  This  has  some  effect  in 
making  a  laborer  more  skilful  and  in  enabling  him  to  con- 
tribute a  larger  share  to  the  public  income.  But  it  does 
not  directly  promote  the  man's  earning  power  to  a  degree 
commensurate  with  the  time  spent  by  the  schoolboy  or 
the  money  spent  by  the  taxpayer.  The  more  advanced 
the  education,  the  greater  is  the  force  of  this  complaint. 


DEMAND  FOR  HIGH-GRADE  LABOR.  335 

A  high  school  course  is  most  useful  to  those  who  reach 
the  higher  walks  of  life ;  but  all  men  cannot  reach  these 
walks  without  overcrowding  them :  and  in  the  lower 
spheres  of  industry  it  often  seems  to  do  the  recipient 
little  good.  The  greatest  gain  from  public  education  lies 
in  the  fact  that  a  people  which  grows  up  with  wide  views 
of  life,  develops  wider  demands  for  consumption.  Instead 
of  a  large  population  chiefly  engaged  in  supplying  itself 
with  a  bare  living,  we  have  a  somewhat  smaller  total 
population,  demanding  and  receiving  more  complex  ser- 
vices which  their  education  has  led  them  to  regard  as 
indispensable,  and  in  whose  purveyance  the  high  grade 
laborer  has  an  advantage  over  his  low  grade  competitor. 
Somewhat  the  same  thing  can  be  said  of  the  grounds  for 
regulating  the  liquor  traffic.  The  waste  of  productive 
power  due  to  indulgence  in  drink  is  only  a  part,  and  per- 
haps not  the  largest  part,  of  the  evils  chargeable  to  drunk- 
enness. Where  the  passion  for  excess  in  drink  stands  in 
the  way  of  intelligent  enjoyment,  it  promotes  poverty, 
not  only  by  making  the  drinking  men  poor  producers, 
but  by  making  the  public  a  poor  consumer. 


CHAPTER  XI. 

MACHINERY   AND   LABOR. 

Alleged  Displacement  and  Degradation  of  Labor — Factory  Acts — Labor 
Organizations — Old  and  New  Methods — Compulsory  Arbitration — 
The  Living  Wage. 

W.  S.  Jevons  ,  "  The  State  in  Relation  to  Labor."    London,  1882. 

J.  A.  Hobson  :  "  The  Evolution  of  Modern  Capitalism."     London,  1894. 

G.  V.  Schulze-Gaevernitz:  "  Der  Grossbetrieb."     Leipzig,  1892. 

The  older  motives  and  ideas  of  English  Trades-Unions  are  well  presented 
by  G.  Howell,  "  Conflicts  of  Capital  and  Labor,"  2d  ed.  London,  1890. 
The  views  of  the  new  unionism  are  given  by  Sidney  and  Beatrice  Webb, 
*'  History  of  Trade  Unionism,"  London,  1894.  There  is  no  correspond 
ingly  complete  history  of  American  labor  movements  ;  perhaps  the  most 
available  is  R.  T.  Ely,  "  The  Labor  Movement  in  America,"  New  York, 
1886. 

§  369.  We  have  thus  far  assumed  that  improvements 
in  the  efficiency  of  labor  were  not  accompanied  by  any 
radical  alteration  in  the  industrial  system ;  that  the  con- 
ditions of  employment  remained  substantially  the  same, 
while  the  power  of  the  individual  workman  was  increased. 
But  in  point  of  fact,  the  greater  part  of  the  increase  in 
the  efficiency  of  modern  labor  has  been  connected  with 
the  use  of  modern  machinery  and  improved  productive 
methods  which  are  under  the  control  of  the  employer  and 
not  of  the  laborer.  Some  people  who  admit  that  the 
laborer  gains  by  the  increase  of  his  own  powers  are  dis- 
posed to  doubt  whether  a  similar  gain  is  possible  for  the 
laborer  when  the  means  of  increased  production  are  held 
in  the  hands  of  the  capitalist.     Especially  doubtful  does 

336 


THE  FACTORY  SYSTEM.  337 

the  case  seem  in  those  large  industries  where  combination 
has  made  the  greatest  progress,  and  where  the  protection 
which  the  workman  receives  from  the  competition  of 
different  capitaHsts  is  apparently  reduced  to  a  minimum. 
§  370.  There  are  three  evils  which  the  opponents  of 
private  capital  charge  against  machinery,  as  now  managed 
and  operated  : 

1.  That  it  displaces  a  large  amount  of  human  labor, 
thus  taking  income  away  from  employees  and  giving  it  to 
employers. 

2.  That  when  it  does  not  actually  drive  human  labor 
out  of  use,  it  employs  it  in  circumstances  unfavorable  to 
efficiency,  health,  and  morals. 

3.  That  under  the  best  conditions  it  deprives  the  work- 
man of  independence,  making  him  a  specialized  machine 
instead  of  a  broad-minded  man. 

§  371.  The  first  charge,  in  its  wider  shape,  is  obviously 
belied  by  the  facts.  Machinery  has  not  displaced  labor. 
On  the  contrary,  there  has  been  a  most  conspicuous  in- 
crease of  employment  in  those  lines  where  improvements 
iri  machinery  have  been  greatest.  The  number  of  persons 
engaged  in  manufacturing  and  transportation  to-day  bears 
a  far  larger  proportion  to  those  engaged  in  agriculture 
than  was  the  case  two  or  three  generations  ago.  The 
urban  population  makes  more  use  of  machinery  than  the 
rural  population  ;  and  it  is  a  conspicuous  fact  that  our 
cities  have  grown  faster  than  the  country  as  a  whole. 
Whatever  else  machinery  may  have  done,  it  certainly  has 
not  kept  labor  out  of  mechanical  industries. 

Nowhere  have  modern  methods  been  more  strikingly 
exemplified  than  in  transportation  industries.  By  the  use 
of  the  railroad  a  single  man  is  enabled  to  do  work  which 
formerly  would  have  been  hardly  within  the  capacity  of  a 
thousand  men.  On  this  very  account  the  introduction  of 
railroads  was  regarded  with  distrust  by  large  classes  of  the 
community.     It  was  thought  that  teamsters,  hostlers,  and 


338  MACHINERY  AND  LABOR. 

innkeepers  would  be  thrown  out  of  employment,  and  that 
there  would  be  no  work  left  for  them  to  do.  But  it  has 
turned  out  that  the  development  of  the  railroad  has 
given  additional  work  to  the  very  classes  which  it  was 
expected  to  antagonize.  While  the  eflficiency  of  human 
labor  in  transportation  has  increased  a  thousand-fold,  the 
volume  of  goods  and  passengers  transported  has  increased 
much  more  than  this.  The  services  of  collection  and 
delivery  of  freight  at  stations  now  employ  as  many  men 
and  horses  as  were  engaged  in  the  whole  movement  of 
freight  a  century  ago.  The  entertainment  of  modern 
travellers  affords  occupation  to  a  larger  number  of  inn- 
keepers than  were  supported  by  the  few  passengers  who 
ventured  to  take  long  journeys  in  ancient  times.  The 
cheapening  of  transportation  attendant  upon  the  use  of 
improved  appliances  has  called  forth  a  development  of 
travel  and  of  freight  shipment  more  than  proportionate 
to  the  increased  efficiency  of  service.  The  aggregate 
demand  for  labor  in  these  lines  has  become  greater  instead 
of  less. 

Nor  is  this  experience  with  railroad  travel  an  isolated 
or  accidental  one.  It  is  characteristic  of  the  effects  of 
modern  mechanical  processes,  wherever  they  have  been 
applied  on  a  large  scale.  The  work  of  machinery  is 
generally  of  such  a  kind  that  it  can  be  made  profitable 
only  by  extensive  public  use.  If  a  community  can  buy 
but  ten  pairs  of  shoes  in  a  year,  it  will  be  more  economi- 
cal to  have  shoes  made  by  hand,  no  matter  what  machinery 
may  be  invented.  In  order  to  obtain  the  advantage  of 
the  best  modern  processes  of  manufacture,  we  must  make 
a  hundred  thousand  pairs  a  year.  The  economy  of  the 
introduction  of  a  machine  consists,  not  in  making  the  old 
product  at  less  expense  and  with  less  labor,  but  in  making 
a  much  larger  product  with  the  same  labor.  What  is 
called  labor-saving  machinery  is  in  fact  not  labor-saving, 
but  product-making.     It  can  only  become  profitable  by 


INSTANCES  OF  INCREASED    WAGES,  339 

meeting  the  wants  of  the  community  as  a  whole,  and  not 
those  of  a  few  rich  men, 

§  372.  Some  detailed  results  of  improvement  in  ma- 
chinery from  1840  to  1883  are  well  illustrated  by  figures 
which  Atkinson  has  collected  from  cotton  mills.  For 
purposes  of  comparison  he  chose  two  mills  which  had 
been  in  operation  throughout  this  period,  which  em- 
ployed substantially  the  same  number  of  operatives  in 
1883  that  they  did  in  1840,  and  which  had  not  changed 
the  valuation  of  their  capital.  During  the  period  in  ques- 
tion, the  output  of  these  mills  had  almost  exactly  trebled. 
This  increase  had  made  it  necessary  to  reduce  the  price 
charged  for  the  services  in  manufacturing  {i.e.,  the  margin 
between  selling  price  and  cost  of  material)  from  about 
three  cents  per  yard  in  1840  to  about  one  cent  and  a  half 
in  1883.  The  wages  paid  had  fallen  from  1.82  cents  per 
yard  in  1840  to  1.08  cents  in  1883;  but  the  profits  had 
fallen  from  1.18  cents  in  1840  to  0.43  cents  in  1883.  The 
share  of  the  laborers  in  the  total  product  had  risen  from 
less  than  61  per  cent  in  the  former  case  to  more  than  68 
per  cent  in  the  latter,  in  the  face  of  a  decided  reduction 
in  the  hours  of  labor,  and  an  even  more  decided  increase 
in  the  number  of  looms  and  spindles  per  operative.  The 
actual  profits  on  the  total  capital  had  remained  about  the 
same,  but  the  wages  per  operative  per  year  had  increased 
64  per  cent.  Other  instances  like  this,  which  have  been 
collected  from  different  lines  of  business,  seem  to  indicate 
that  under  the  modern  industrial  system  there  is  a  ten- 
dency toward  increase  of  wages  and  relative  diminution 
of  profits. 

To  this  optimistic  view,  that  machinery  benefits  the 
laborer  rather  than  the  employer,  there  are  certain  objec- 
tions which  must  be  carefully  examined. 

§  373.  The  increase  of  large  fortunes  on  the  part  of  the 
owners  of  capital  while  so  many  of  their  operatives  have 
accumulated  little  or  nothing  is  held  by  many  to  prove 


340  MACHINERY  AND  LABOR. 

that  the  capitalists  have  been  the  chief  gainers  in  modern 
industrial  progress.  The  growing  contrast  between  wealth 
and  poverty  seems  to  indicate  that  the  rich  are  growing 
richer  and  the  poor  poorer.  In  a  new  community,  few 
are  very  rich,  but  few  are  in  danger  of  starvation.  As  the 
community  becomes  older,  the  disparity  between  the 
richest  and  the  poorest  becomes  greater  with  each  suc- 
ceeding year.  This  fact  of  itself  is  thought  suflficient  to 
prove  that  progress  increases  the  advantages  of  capital  as 
compared  with  those  of  labor. 

This  reasoning  is  inconclusive.  Differences  of  accumu- 
lated wealth  of  different  members  of  the  community  prove 
nothing  as  to  ratios  of  income  of  different  classes. 

The  disparity  in  the  accumulations  of  different  men  is 
likely  to  become  more  marked  as  the  amount  of  wealth  in 
any  community  grows  larger.  There  is  always  a  number 
of  people  who  stand  at  the  zero  point  in  the  matter  of 
accumulation.  Some  men  gamble  and  get  rid  of  their 
property  at  once  ;  some  men  drink  and  get  rid  of  it 
almost  as  speedily.  Some  without  either  gambling  or 
drinking  are  so  shiftless  that  they  refuse  to  work  as  long 
as  they  have  a  dollar  in  their  pockets.  Some,  again,  are 
unfortunate,  through  no  fault  of  their  own,  and  fall  into 
the  fate  of  the  shiftless  unless  relieved  by  charity.  If 
property  were  evenly  divided  to-day,  there  would  soon  be 
some  men  who  had  none  and  others  who  had  a  great  deal. 
The  successful  gambler  and  the  saloon  keeper  will  benefit 
by  the  losses  of  their  victims;  the  industrious  or  fortunate 
man  will  find  himself  gradually  drawing  ahead  of  the  shift- 
less or  unfortunate.  The  more  capital  there  is  in  the  com- 
munity the  greater  these  differences  are  sure  to  become. 
With  the  increasing  wealth  of  modern  nations  there  has 
inevitably  been  an  increasing  disparity  between  the  accu- 
mulations of  those  who  have  most  and  of  those  who  have 
least. 

But  this  does  not  always  represent  a  difference  in  in- 


ACCUMULATIONS  AND  INCOME.  341 

come.  The  income  of  the  man  who  has  saved  nothing 
may  be  larger  than  that  of  the  man  who  has  saved  a  hun- 
dred or  a  thousand  dollars  a  year.  Nor  does  it  represent 
a  difference  in  enjoyment.  The  enjoyment  of  different 
classes  and  different  individuals  in  the  community  is 
measured  by  their  expenditure,  not  by  their  accumula- 
tions. The  most  careful  calculations  show,  that  side  by 
side  with  the  increase  of  accumulations,  and  partly  as  its 
direct  consequence,  the  proportion  of  enjoyment  which 
goes  to  labor  is  becoming  larger,  and  the  proportion  which 
accrues  to  capital  relatively  smaller.  Just  as  increased 
numbers  of  laborers  mean  increased  competition  for  em- 
ployment, forcing  the  position  of  the  laboring  classes 
downward,  so  increased  accumulations  of  capital  mean 
increased  competition  for  the  services  of  the  laborers,  forc- 
ing the  relative  income  of  the  capitalists  downward  and 
that  of  the  laborers  upward.  It  is  in  large  measure  be- 
cause of  the  enormous  investments  of  capital  and  the 
resulting  keenness  of  competition  among  employers,  that 
the  proportion  of  the  public  income  going  to  the  laborers 
has  steadily  increased.' 

'  Several  attempts  have  been  made  to  measure  the  relative  shares  of  the 
annual  product  received  by  capitalists  and  laborers  at  diiTerent  times.  Rae 
has  made  an  estimate  for  England  on  the  basis  of  figures  furnished  by 
Gregory  King  for  1688  and  by  Dudley  Baxter  for  1867.  Using  the  term 
"  working  class  "  somewhat  narrowly,  so  as  to  exclude  those  receiving  salaries 
or  fees,  he  calculates  that  in  1688  74  per  cent  of  the  population  belonged  to 
the  working  class,  and  earned  collectively  26  per  cent  of  the  entire  income 
of  the  country  ;  while  in  1867  somewhat  less  than  80  per  cent  belonged  to  the 
working  class  and  earned  collectively  40  per  cent  of  the  income  of  the  com- 
munity. Atkinson  has  made  a  similar  estimate  for  the  United  States  in  1880 
in  which  he  has  included  with  the  working  class  the  salary-receivers  as  well 
as  the  wage-receivers.  Taking  his  figures  from  the  United  States  census  of 
1880,  he  estimates  the.  value  of  the  commercial  product  of  the  country  at 
$10,000,000,000,  while  the  amount  paid  in  wages  and  salaries  of  every  kind 
was  $9,000,000,000.  As  1880  was  very  nearly  a  normal  year,  not  conspicu- 
ously marked  by  either  inflation  or  depression,  and  as  the  census  of  1880  was 
better  managed  than  any  other  in  the  history  of  the  United  States,  he  be- 
lieves that  this  represented  very  nearly  the  ratio  of  wages  to  profits.     The 


342  MACHINERY  AND  LABOR. 

§  374.  It  is  urged  as  proof  of  the  diminishing  share  of 
labor  in  the  industrial  product,  that  modern  methods 
cause  more  time  to  elapse  between  the  rendering  of  labor 
and  the  receipt  of  the  product ;  that  while  the  rate  of 
profit  has  doubtless  fallen,  this  fall  is  not  proportionate  to 
the  increase  in  the  average  duration  of  the  process  ;  and 
that  the  ratio  of  total  profits  to  total  wages  must  there- 
fore have  increased. 

To  this  view  it  may  be  answered,  first,  that  the  rate  of 
profit  (as  distinct  from  the  rate  of  interest)  has  fallen  most 
conspicuously  in  large  industries  with  much  fixed  capital. 
Goods  are  produced  and  sold  on  far  narrower  margins.  A 
few  large  employers  can  make  more  accurate  calculations 
of  cost  than  a  number  of  small  ones  ;  and  the  very  scale 
on  which  the  work  is  done,  while  it  often  seems  to  pre- 
clude competition,  really  gives  publicity  to  the  facts  with 
regard  to  production  and  sale  in  a  way  to  ensure  more 
fully  both  to  laborers  and  consumers  the  benefit  of  the 
one-price  system.  It  may  be  added  in  the  second  place, 
that  instances  of  mistaken  investment  in  machinery  which 
gives  no  profit  at  all,  tend  to  reduce  the  gains  of  the  capi- 
talist classes  to  a  far  greater  degree  than  any  one  would 
assume  who  did  not  make  the  calculation  in  detail. 

§  375.  Another  objection  to  the  view  that  the  benefit 
of  machinery  has  gone  chiefly  to  the  laboring  classes  is 
based  on  the  fact  that  the  hours  of  labor  have  not  been 
reduced  in  proportion  to  the  increased  efficiency  which 

small  proportion  of  profits  under  this  estimate  has  excited  general  surprise, 
and  Hawley,  in  his  criticism  of  Atkinson's  methods,  points  out  that  the  total 
current  product  of  the  year  i88o  should  include  the  value  of  services  ren- 
dered, as  well  as  goods  consumed.  Adding  $2,000,000,000  on  this  ground, 
Hawley  makes  the  total  sum  to  be  divided  between  labor  and  capital  $12,- 
000,000,000,  and  the  proportion  of  wages  to  profits  3  to  i  instedd  of  g  to  I, — 
a  much  more  plausible  result.  But  all  estimates  of  this  kind,  however  care- 
fully made,  are  beset  with  difficulties,  both  theoretical  and  practical.  For 
the  product  which  is  distributed  between  laborers  and  capitalists  is  to  be 
measured  as  income,  not  as  capital ;  it  is  a  flow,  and  not  a  fund  ;  and  this 
fact  enormously  enhances  the  difficulties  of  observing  and  measuring  it. 


MARX'S  ARGUMENT.  343 

the  new  mechanical  methods  have  given.  Marx  and  his 
followers  make  a  great  deal  of  this  argument.  They  say 
that  the  inventions  and  appliances  of  the  nineteenth  cen- 
tury have  increased  the  power  of  labor  in  every  line,  and 
that  its  average  productiveness  to-day  can  hardly  be  less 
than  three  times  what  it  was  in  1800.  Therefore,  if  the 
laborer  at  the  beginning  of  the  present  century  Avorked 
twelve  hours  a  day  to  obtain  a  bare  living,  he  ought  now 
to  be  able  to  secure  the  same  result  in  four  hours.  If,  in 
spite  of  improvements,  he  continues  to  work  ten  or  eleven 
hours  for  starvation  wages,  it  shows  that  the  result  of  six 
or  seven  hours'  time  has  been  quietly  appropriated  by  the 
capitalist. 

The  answer  to  this  argument  has  been  indicated  in  a 
previous  chapter.  When  a  larger  amount  of  products  is 
placed  at  the  disposal  of  the  community,  different  classes 
of  laborers  utilize  that  increase  in  three  or  four  distinct 
ways.  Some  employ  it  in  shortening  their  hours  of  labor, 
some  in  extending  their  consumption  of  comforts  and 
luxuries  or  their  control  of  industrial  enterprises.  Progress 
has  been  made  in  all  these  directions.  Some  laborers 
have  become  capitalists.  Many  more  have  increased  their 
consumption  of  comforts  and  luxuries.  The  hours  of 
labor  have  been  considerably  shortened.  But  a  large 
class  of  laborers  has  been  content  to  increase  its  numbers, 
and  has  fallen  into  those  lines  of  industry  where  the  maxi- 
mum economy  is  obtained  by  employing  a  large  number 
of  people  for  a  small  daily  wage.  The  effect  of  machinery 
on  the  laboring  classes  as  a  whole  is  not  to  be  judged  by 
its  effect  on  those  sections  of  the  laboring  class  which, 
either  by  fault  or  misfortune,  have  placed  themselves  in 
the  position  to  obtain  a  minimum  benefit,  either  as  pro- 
ducers or  as  consumers. 

§  376.  Another  argument  of  those  who  believe  that 
machinery  has  hurt  the  laborer  is  based  on  the  facts 
observed    in    every   commercial   crisis.      The   most  con- 


344  MACHINERY  AND  LABOR. 

spicuous,  if  not  the  most  serious,  distress  connected  with 
hard  times  is  found  in  those  lines  where  there  has  been 
great  duplication  of  machinery;  lines  where  the  machines 
and  the  laborers  together  are  far  more  than  able  to  supply 
the  popular  demand  for  products  and  services  at  rates 
which  will  keep  the  workman  and  his  family  alive.  This 
criticism  is  not  to  be  set  aside  like  the  two  already  noticed. 
The  suffering  from  this  source  is  terribly  severe.  The 
best  that  can  be  said  is,  that  the  evil  is  due,  not  so  much 
to  the  introduction  of  machinery  as  to  variations  in  the 
rate  of  its  introduction,  and  that  it  is  one  which,  after  a 
comparatively  short  period,  works  its  own  cure. 

§  377.  Let  us  examine  the  nature  of  the  process  by 
which  machinery  leads  to  over-production  and  throws 
men  out  of  employment. 

While  a  new  machine  is  in  process  of  construction,  there 
is  a  large  temporary  demand  for  labor  in  making  it.  The 
capitalist  is  spending  money  which  he  hopes  gradually  to 
recoup  by  the  sale  of  the  products  or  services  of  this  ma- 
chine. Until  it  is  finished  it  causes  an  increased  demand 
for  labor  in  the  coal  and  iron  trades,  which  are  chiefly 
concerned  with  the  production  of  machinery  ;  after  it  is 
finished,  it  creates  a  permanently  increased  supply  of 
consumable  products  or  services  in  its  own  particular  line 
of  work.  The  capitalist  expects  that  a  moderate  reduc- 
tion in  the  price  of  those  products  will  cause  an  increase 
in  their  consumption  sufficient  to  enable  him  to  sell 
them. 

If  as  a  result  of  a  commercial  panic  there  is  a  sudden 
cessation  of  investment  in  new  machinery,  we  have  a 
stoppage  of  demand  for  labor  in  the  coal  and  iron  trades, 
while  the  supply  of  consumable  products  of  machinery 
remains  unimpaired.  The  loss  of  employment  in  the 
trades  concerned  with  the  production  of  machinery  oper- 
ates to  check  consumption,  since  these  laborers — no  small 
percentage  of  the  whole  people — find  themselves  without 


T 


IRREGULARITY  OF  EMPLOYMENT.  345 

money  to  spend.  The  manufacturers  are  left  with  a  large 
surplus  of  unsalable  products  on  their  hands.  In  order  to 
avoid  an  accumulation  of  unsold  stock  they  are  obliged 
to  limit  the  output  of  their  mills,  and  thus  the  reduction 
of  employment  extends  far  beyond  the  sphere  of  the 
trades  that  were  first  affected  and  causes  great  suffering 
to  laborers  in  almost  every  line  of  industry. 

§  378.  This  suffering  constitutes  perhaps  the  most  seri- 
ous ground  for  the  indictments  of  the  socialists  against 
the  capitalistic  system  of  production.  It  is  not,  however, 
chargeable  to  machinery ;  nor  even  to  the  private  owner- 
ship of  machinery,  for  we  find  similar  irregularities  of 
employment  in  industrial  enterprises  managed  by  govern- 
ment. It  is  due  to  variations  in  the  rate  at  which 
machinery  is  introduced  ;  variations  stimulated  some- 
times by  inflation  in  the  currency,  sometimes  by  unwise 
tariff  legislation,  sometimes  by  the  abuse  of  commercial 
credit  and  the  reaction  which  inevitably  follows  it.  Nor  is 
the  position  of  the  laborers  permanently  depressed  by  these 
misfortunes.  The  chief  ultimate  loss  falls  on  the  capitalists. 
Fixed  capital  is  almost  always  permanently  reduced  in 
value  by  the  readjustments  of  a  commercial  crisis,  while 
wages  return  to  their  old  figure  in  the  next  recurring 
period  of  prosperity. 

§  379.  The  second  great  charge  made  (§  370)  against  the 
factory  system  is  that  it  displaces  a  higher  grade  of  labor  by 
a  lower  grade  ;  sometimes  substituting  the  work  of  women 
and  children  for  that  of  men  ;  sometimes  substituting  work 
under  conditions  physically  or  morally  unhealthful,  for 
work  under  healthful  conditions ;  sometimes  Substituting 
specialized  and  mechanical  work  for  diversified  occupation 
which  contributes  to  general  intelligence. 

§  380.  In  point  of  fact,  the  introduction  of  machinery  has 
not  been  attended  with  an  increase  in  the  proportion  of 
labor  done  by  women  and  children,  but  with  a  diminution. 
If  we  wish  to  find  the  place  where  the  largest  amount  of 


346  MACHINERY  AND  LABOR. 

work  is  done  by  the  weaker  members  of  society,  we  must 
look  to  the  peoples  whose  civilization  is  least  advanced. 
A  much  larger  proportion  of  industrial  work  is  done  by 
women  in  the  unprogressive  parts  of  Europe,  where  mod- 
ern machinery  is  little  known,  than  in  those  which  have 
felt  the  fullest  effects  of  economic  progress.  As  we  ex- 
amine the  changes  in  the  United  States  from  one  decade 
to  another,  we  find  that  successive  censuses  show  an  in- 
creasing proportion  of  men  engaged  in  manufactures,  a 
nearly  stationary  proportion  of  women,  and  an  actually 
decreasing  proportion  of  children.  While  there  is  proba- 
bly much  more  employment  of  women  and  children  in 
factories  than  is  desirable  for  the  best  interests  of  the  com- 
munity, the  facts  which  we  have  at  command  indicate 
that  we  are  better  ofT  in  this  respect  to-day  than  we  have 
been  in  previous  generations. 

§  381.  Those  who  hold  the  opposite  view  and  think 
that  the  use  of  machinery  increases  the  proportion  of 
women's  and  children's  labor,  rely  on  two  arguments  to 
prove  their  position.  In  the  first  place,  they  say  that  the 
introduction  of  machinery  dispenses  with  the  necessity  of 
physical  strength,  and  enables  the  weaker  members  of  the 
community  to  do  many  things  which  formerly  required 
the  direct  attention  of  the  stronger.  This  is  true  as  far, 
as  it  goes,  but  it  is  inconclusive.  Machinery  in  its  com- 
plicated forms  may  lessen  the  demand  for  physical 
strength,  but  it  greatly  increases  the  demand  for  responsi- 
bility in  handling  it.  The  races  which  are  successful  in 
dealing  with  machinery  are  those  which  have  the  mental 
and  moral  qualities  that  enable  them  to  operate  it  with- 
out destruction.  A  lessened  demand  for  strength  which 
might  increase  the  use  of  child  labor  is  counterbalanced 
by  an  increasing  demand  for  continuity  of  attention  and 
intelligent  care  which  makes  such  labor  inapplicable. 

§  382.  Another  argument  of  those  who  believe  that  the 
factory  system  has  increased  the  employment  of  women 


UNHEALTHFUL  EMPLOYMENT.  347 

is  founded  on  the  high  rate  of  infant  mortality  which  pre- 
vails in  large  cities.  It  is  said  that  this  points  clearly  to 
the  employment  of  married  women  in  factories  when  they 
should  be  attending  to  their  children  at  home.  This  in- 
ference is  not  fairly  warranted.  The  conditions  of  city 
life  are  so  far  adverse  to  the  health  of  little  children  that 
we  may  expect  to  see  a  high  infant  death-rate  in  cities, 
whether  the  mother  stays  at  home  or  goes  out  to  work. 
In  England,  where  the  vital  statistics  are  far  more  accu- 
rately kept  than  in  this  country,  the  largest  percentage  of 
infant  mortality  is  seen  in  Liverpool,  which  among  all  the 
leading  English  cities  is  probably  least  devoted  to  manu- 
facturing. So  far  as  the  factory  system  has  caused  peo- 
ple to  crowd  in  cities  it  may  be  held  responsible  for  the 
increase  of  infant  mortality  ;  but  it  is  through  the  lack  of 
air  and  sunlight  that  this  effect  seems  to  be  produced, 
rather  than  through  the  employment  of  married  women 
in  factories. 

§  383.  The  charge  that  factory  labor  is  physically  un- 
healthful  is  so  vague  as  to  be  difficult  to  discuss.  Some 
factory  employments  are  of  course  injurious  to  health  ;  so 
are  some  home  employments.  If  we  wish  to  see  labor  in  its 
most  abject  circumstances  we  must  look,  not  to  the  large 
factory,  but  to  those  survivals  of  the  earlier  domestic  sys- 
tem of  industry  which  are  exemplified  in  the  tenement- 
house  districts  of  New  York  or  the  East  End  of  London. 
The  crowding  in  factories  with  insufficient  air  space  or 
bad  ventilation  is  sometimes  a  great  evil ;  but  the  air 
space  and  ventilation  of  factories  are  as  a  rule  indefinitely 
better  than  the  air  space  and  ventilation  to  which  the 
operatives  are  elsewhere  accustomed.  "  The  trouble," 
says  Colonel  Wright  in  his  monograph  on  the  factory 
system  of  the  United  States,  "  is  not  in  the  air  space  of 
the  factories  but  in  that  of  the  homes.  The  air  of  a  cot- 
ton factory  is  better  than  that  of  a  lecture  room."  The 
statistics  of  mortality  in  the  various  occupations  are  not 


348  MACHINERY  AND  LABOR. 

at  all  decisive  as  to  the  healthfulness  or  unhealthfulness 
of  factory  life.  According  to  Colonel  Wright's  observa- 
tion, they  "  prove  the  one  or  the  other  conclusion,  as  the 
motive  of  the  person  using  the  statistics  may  indicate." 

§  384.  Nor  are  the  moral  results  of  the  factory  system 
as  bad  as  those  of  the  domestic  system  which  it  super- 
seded.  The  intemperance  of  manufacturing  towns  seems 
to  be  a  result  of  town  life  rather  than  of  manufacturing. 
It  has  been  proved  in  France  that  drunkenness  among 
factory  operatives  is  less  than  among  laborers  of  other 
kinds ;  and  it  is  believed  by  Colonel  Wright  that  the  same 
thing  can  be  said  of  the  United  States.  It  is  still  clearer 
that  the  factory  system  does  not  promote  prostitution. 
The  small  number  of  prostitutes  coming  from  the  ranks 
of  factory  operatives  is  most  conspicuous  in  every  inves- 
tigation of  the  subject. 

§  385.  "The  great  evils  which  became  apparent  during 
the  early  days  of  the  factory  system  were  simply  the  results 
of  bringing  together  the  labor  which  had  become  pauper- 
ized under  the  domestic  system  and  in  agricultural  dis- 
tricts. The  factory  brought  these  evils  to  light ;  and  the 
employment  of  women  and  children  became  an  offence  in 
the  eyes  of  the  public,  not  because  it  was  severer  than 
under  the  old  system,  but  because  under  the  new  the 
evils  of  such  employment  could  be  seen."  When  these 
things  were  brought  to  the  notice  of  the  public,  measures 
were  at  once  taken  to  remedy  them,  not  as  a  rule  by  the 
workmen  themselves  but  by  sections  of  the  public  which 
now  became  cognizant  for  the  first  time  of  wrongs  which 
had  existed  for  centuries.  The  larger  the  factory,  the 
more  visible  are  the  evils  and  the  more  effectively  does  it 
become  possible  to  control  them,  either  by  law  or  by  public 
opinion.  The  factory  system  has  not  created  the  abuses 
M'hich  are  charged  against  it ;  it  has  created  the  oppor- 
tunity of  holding  employers  responsible  for  their  preven- 
tion.    This  opportunity  has  been  most  effectively  utilized 


r 

'0' 


FACTORY  ACTS.  349 

in  England,  the  birthplace  of  modern  manuActuring; 
while  of  all  the  United  States,. Massachusetts,  which  was 
the  first  to  establish  factories,  has  done  the  most  to 
regulate  their  methods  and  to  improve  the  condition  of 
their  operatives. 

§  386.  Much  has  already  been  accomplished  in  these 
lines.  The  labor  of  very  young  children  has  been  pro- 
hibited, and  that  of  older  ones  restricted  in  such  a  way  as 
to  enable  them  to  attend  school.  Female  labor  has  been 
subjected  to  regulations  which  are  at  once  effective  and 
salutary.  Even  for  adult  men,  the  hours  of  employment 
have  been  decidedly  reduced,  to  some  degree  by  law  and 
much  more  by  public  sentiment.  Half  a  century  ago, 
thirteen  hours  was  n<ot  an  uncommon  working  day  for  a 
factory  operative.  Now,  eleven  represents  a  maximum  in 
progressive  communities,  while  the  average  working  time 
in  such  places  is  under  rather  than  over  ten  hours.' 

An  equally  important  branch  of  factory  legislation 
deals  with  unhealthful  methods  of  conducting  business. 
It  would  be  tedious  to  enumerate  provisions  made  in  the 
statutes  of  different  states  and  countries,  with  regard  to 
ventilation,  protection  from  fire,  and  provision  against 
various  forms  of  accident  to  which  those  who  use  machin- 
ery are  liable.  Apart  from  any  system  of  statutory  enact- 
ments, much  has  been  done  by  the  enlightened  self-interest 
of  the  factory  owners.  Manufacturers'  mutual  insurance 
companies  (§  431)  have  sought  to  reduce  losses  by  avoid- 
ing all  preventable  causes  of  fire,  and  have  succeeded  to 
an  astonishing  degree.  Associations  for  boiler  inspection 
are  able  to  use  a  vigilance  which  in  most  districts  far  sur- 
passes that  which  can  be  expected  from  the  public  officials, 
and  have  prevented  much  loss  of  life  to  the  workmen,  as 
well  as  loss  of  property  to  the  employer. 

'  A  fuller  discussion  of  laws  regulating  the  hours  of  labor,  not  as  means 
to  public  health,  but  as  efforts  to  reduce  the  labor  supply  and  create  em- 
ployment for  those  now  out  of  work,  will  be  found  in  ch.  xiii. 


350  MACHINERY  AND  LABOR. 

§  387.  •Meantime  there  has  been  a  great  change  in  the 
views  which  prevail  with  regard  to  employers'  liability  in 
the  matter  of  accidents.  The  common-law  doctrine  on 
this  subject  was  exceedingly  unfavorable  to  the  workman. 
It  generally  made  him  responsible  for  injuries  which  he 
suffered  in  the  exercise  of  his  trade.  It  was  held  that  in 
accepting  the  employment  he  took  the  risks  incident  to 
it.  A  special  hardship  in  this  matter  arose  from  the  pro- 
vision that  a  workman  could  get  no  compensation  for 
harm  sustained  through  the  negligence  of  a  fellow  work- 
man. The  old  doctrine  appears  to  have  assumed  that  the 
employee,  and  not  the  employer,  was  in  a  position  to  tell 
what  was  going  on  ;  that  the  way  to  prevent  carelessness 
was  to  hold  the  workman  responsible  for  the  results  of 
such  carelessness  on  the  part  of  himself  or  his  fellows. 
In  the  modern  factory  a  policy  of  this  kind  does  not  put 
the  responsibility  where  it  belongs.  In  a  very  large  class 
of  accidents  arising  from  defects  of  ways,  works,  or  ma- 
chinery, the  employer  is  usually  in  a  better  position  than 
the  workman  to  know  what  is  wrong  and  to  take  effective 
measures  to  prevent  accidents.  Even  in  those  cases  where 
injuries  are  caused  by  the  negligence  of  a  fellow  workman, 
the  organization  of  modern  industry  gives  the  employer 
power  to  prevent  such  casualties  more  effectively  than 
the  employee.  There  is  a  strong  tendency  to  place  in- 
creased responsibility  on  the  owner  of  the  works  both  for 
defects  of  his  buildings  or  machinery  and  for  negligence 
of  his  subordinates ;  a  tendency  which  has  found  most 
marked  expression  in  the  Employer's  Liability  Law  of 
Great  Britain. 

§  388.  The  charge  that  the  factory  system  tends  to  de- 
prive the  laborer  of  independence,  and  reduce  him  to  the 
position  of  a  machine,  is  not  so  easily  set  aside.  The  sub- 
stitution of  mechanical  for  intelligent  labor  is  often  a  very 
serious  evil  in  modern  manufacturing.  Not  only  are  indi- 
vidual forms  of  acquired  skill,  like  that  of  the  hand-loom 


THE  MODERN  LABORER.  35  I 

weavers  at  the  beginning  of  this  centurj',  made  useless  by 
the  introduction  of  new  machinery,  but  large  classes  of 
men  who  were  most  useful  citizens  in  the  past  are  being 
driven  out  of  existence  by  the  stress  of  modern  competi- 
tion. The  increasing  efficiency  connected  with  the  division 
and  organization  of  labor  has  crowded  out  those  men  who 
exercised  a  diversified  industry.  It  is  not  merely  the 
jack-of-all-trades,  but  the  master  of  one  trade,  that  finds 
it  difficult  to  compete  with  the  employees  who  subdivide 
his  trade  into  a  hundred  different  parts.  The  village  black- 
smith finds  his  occupation  gone  when  so  large  a  part  of 
his  product  can  be  made  by  machinery  at  one-tenth  of 
the  old  cost.  We  have  secured  diversification  of  con- 
sumption through  the  cheapening  of  products,  but  it  has 
been  obtained  at  the  sacrifice  of  diversified  industrial 
activity  on  the  part  of  the  men  who  make  those  products. 
It  is  undeniable  that  labor  is  becoming  more  and  more 
specialized,  and  that  many  of  the  occupations  of  the 
modern  laborer  have  a  narrowing  effect  upon  those  who 
practise  them. 

§  389.  Nevertheless  we  may  safely  deny  that  this  change 
is  causing  an  intellectual  decline  among  the  masses.  The" 
gain  in  opportunities  for  travel  and  for  varied  enjoyment 
has  outweighed  the  loss  in  opportunity  for  changes  of 
occupation.  We  may  regret  the  disappearance  of  certain 
attractive  qualities,  as  the  frontiersman  gives  place  to  the 
farmer,  the  farmer  to  the  craftsman,  the  craftsman  to  the 
modern  workman.  There  is  a  progressive  loss  of  inde- 
pendence and  self-sufficiency,  and  sometimes  of  self- 
reliance.  Yet,  on  the  whole,  we  find  that  advancing 
civilization  brings  gains  which  more  than  make  up  for  the 
losses.  The  agricultural  people  has  more  to  make  life 
worth  living  than  the  tribe  of  hunters.  The  craftsmen 
dwelling  in  cities  have  more  variety  than  the  purely 
agricultural  peoples.  The  change  from  handicraft  to 
manufacture,  in  spite  of  its  attendant  dangers,  yields  the 


\ 


352  MACHINERY  AND  LABOR. 

public  a  gain,  not  only  in  material  wealth,  but  in  breadth 
and  variety  of  civilization. 

§  390.  This  improvement  in  the  material  and  intellectual 
condition  of  the  laborers  has  not  made  the  movements 
toward  combination  of  labor  any  less  active.  In  fact,  it 
has  probably  tended  to  stimulate  them.  Just  because  the 
laborer  has  so  many  advantages  as  a  consumer,  he  is 
often  led  to  feel  more  keenly  his  lack  of  independence  as 
a  producer.  Increased  comfort  is  attended  with  increased 
ambition.  Even  if  combinations  of  capital  give  relatively 
good  wages,  combinations  of  labor  may  seem  necessary  to 
insure  the  laborers  against  the  loss  of  all  industrial  and 
social  power. 

§  391.  There  was  probably  a  slender  historical  connec- 
tion between  the  remnants  of  the  old  trade  gilds  and  the 
first  trades-unions  of  modern  times.'  But  the  tie  was  an 
accidental  and  unimportant  one.  The  modern  organiza- 
tions differ  in  principle  from  their  mediaeval  predecessors. 
The  gilds  were  really  organizations  of  capital  quite  as 
much  as  of  labor.  They  controlled  what  little  machinery 
was  used  in  the  manufacturing  processes  of  early  days. 
They  broke  down  not  so  much  because  other  laborers 
competed  with  them,  as  because  other  capitalists  had 
better  methods  by  which  they  were  prepared  to  serve  the 
community  cheaper.  The  modern  union  is  distinctively 
a  combination  of  labor  and  not  of  capital.  It  is  an  out- 
growth of  the  factory  system ;  an  effort  to  meet  concen- 
tration of  power  on  the  part  of  employers  by  similar 
concentration  on  the  part  of  the  employed. 

§  392.  At  the  beginning  of  the  present  century  the  law 
and  the  public  sentiment  among  the  property-owning 
classes  were  both  unfavorable  to  the  organization  of 
labor.  This  was  conspicuously  the  case  in  England.  To 
say  that  laborers  were  not  allowed  to  combine  in  defence 
of  their  rights  is  to  put  the  matter  altogether  too  mildly. 

'  Brentano's  evidence  on  this  point  seems  conclusive. 


TRADES-UNIONS.  353 

The  slightest  attempt  at  concurrent  action  to  increase  the 
price  of  their  services  was  visited  by  the  severest  penalties. 
As  late  as  1834,  six  Dorchester  laborers  were  sent  as  con- 
victs to  Botany  Bay  for  the  mere  act  of  forming  a  labor 
organization  which  had  not  even  asked  for  an  advance  of 
wages.  But  with  the  growth  of  democratic  spirit  and 
democratic  power,  a  more  liberal  policy  began  to  prevail.' 
Not  the  least  important  among  the  series  of  English  fac- 
tory acts  were  those  which  gave  increasing  recognition  of 
the  right  of  laborers  to  combine. 

§  393'  The  change  in  public  sentiment  toward  trades- 
unions  has  not  quite  kept  pace  with  the  changes  in  the 
law.  In  the  minds  of  a  large  section  of  the  public,  labor 
unions  are  chiefly  associated  with  strikes.  It  is  believed 
by  many  who  ought  to  know  better,  that  such  organiza- 
tions exist  for  the  purpose  of  striking,  and  that  if  the 
organizations  were  suppressed,  industrial  peace  would  be 
secured. 

The  first  of  these  ideas  is  a  distorted  one ;  the  second 
is  wholly  unfounded.  Even  in  their  severest  days,  com- 
bination laws  did  not  prevent  strikes.  Where  a  number 
of  operatives  are  bound  together  by  a  common  feeling 
they  will  take  united  action  for  what  they  deem  to  be 
their  rights,  even  if  they  have  had  no  chance  for  previous 
agreement  or  discussion.  The  attempt  to  prevent  such 
previous  discussion  tends  to  make  the  strike  more  violent 
by  putting  it  wholly  under  the  control  of  feeling  and 
giving  no  place  for  reason  among  those  who  take  part  in 
it.  Under  such  circumstances  we  shall  have  recklessness 
and  terrorism,  if  not  actual  bloodshed  or  arson.  Where 
all  organization  of  labor  is  placed  under  the  ban  of  the 
law,  such  unions  as  continue  to  exist  in  defiance  of  the 
law  are  forced  to  develop  their  worst  sides.     The  recog- 

'  A  similar  change  which  took  place  in  the  United  States  was  much  less 
conspicuous,  because  combination  laws  in  America  had  never  been  admin- 
istered in  as  severe  a  spirit  as  that  which  prevailed  on  the  other  side  of  the 
Atlantic. 
=»3 


354  MACHINERY  AND  LABOR. 

nition  of  the  right  of  labor  to  combine  has  made  a 
decided  change  for  the  better  in  trades-union  policy. 
It  has  substituted  open  methods  of  warfare  for  secret 
ones.  It  has  allowed  the  more  cool-headed  workman  to 
take  a  prominent  part  in  guiding  his  fellow-laborers  in 
their  conflicts  with  capital.  It  has  tended  to  make  strikes 
more  rational,  and  therefore  more  dangerous  to  those  who 
resist  them. 

§  394.  A  union  whose  primary  object  is  conflict  rarely 
has  funds  enough  to  carry  its  conflicts  to  a  successful 
issue.'  The  stronger  and  better  unions  are  organized  for 
purposes  of  insurance  and  other  forms  of  mutual  benefit 
no  less  than  for  conflict.  They  are  responsible  bodies, 
prepared  to  make  contracts  with  capital  as  well  as  to 
fight  against  it.  It  is  the  possession  of  this  permanent 
organization  and  the  control  of  the  funds  connected  with 
it  which  make  these  unions  such  dangerous  enemies  in 
time  of  war.  But  this  same  permanence  of  organization 
renders  them  less  ready  to  engage  in  conflicts  without 
carefully  computing  the  chance  of  bringing  those  conflicts 
to  a  successful  issue.  They  have  acquired  a  store  of  past 
experience  both  in  victory  and  in  defeat.  They  have  in 
many  instances  become  holders  of  considerable  property 
of  their  own.  They  show  the  conservative  spirit,  not  to 
say  the  exclusiveness,  to  which  the  possession  of  expe- 
rience and  the  ownership  of  property  so  often  give  rise. 
It  is  a  constant  complaint  of  the  more  radical  agitators  in 
England  that  the  older  trades-unionists  have  no  sympathy 
with  labor  as  a  whole,  but  are  interested  only  in  the  pros- 
perity of  a  small  body  of  laborers.  The  same  charge  is 
made  in  the  United  States  against  the  conduct  of  some 
of  the  organizations  which  represent  skilled  labor  only. 
Many  of  the  workmen  who  are  most  in  need  of  help 
find  as  little  sympathy  from  a  high  grade  union  as  from  a 

'  The  apparent  exceptions   in    recent    English    experience   have   hardly 
lasted  long  enough  to  be  quoted  in  disproof  of  this  "itatement. 


THE  NEW   UNIONISM.  355 

landowner  or  a  capitalist.  Under  such  circumstances,  a 
"  new  unionism  "  has  grown  up,  which  seeks  to  advance 
the  cause  of  all  laborers,  instead  of  that  of  the  favored 
few.  In  England  this  movement  numbers  among  its 
adherents  nearly  all  of  the  most  distinguished  among  the 
younger  members  of  the  labor  party.  In  the  United 
States,  the  ideas  underlying  this  movement  were  set  forth 
by  the  Knights  of  Labor,  an  organization  which  in  the 
years  1885  and  1886  grew  to  almost  unprecedented 
magnitude.  The  Knights  of  Labor  were  not  organized 
according  to  trade, — though  it  might  readily  happen  that 
all  the  members  of  one  local  assembly  might  be  working 
in  the  same  trade, — but  according  to  locality.  They  were 
not  occupied  with  advancing  the  interests  of  a  particular 
class  of  laborers,  except  so  far  as  the  interest  of  that  class 
was  thought  to  be  a  part  of  the  common  interest  of  labor 
against  capital.  On  the  continent  of  Europe,  where  labor 
unions  have  been  from  the  first  largely  under  the  dominion 
of  socialistic  ideas,  the  revolt  against  the  exclusiveness  of 
the  older  unions  finds  even  more  unquestioning  sympathy 
than  in  England  or  America.* 

^  The  labor  movements  on  the  continent  of  Europe  are  political  rather 
than  economic  in  their  character.  Their  leaders  are  far  more  occupied  with 
the  overthrow  of  oligarchic  institutions  than  with  the  improvement  of  indus- 
trial conditions.  The  "  social  democrat"  is  a  democrat  first  and  a  socialist 
afterward.  Much  of  the  odium  and  misunderstanding  attaching  to  the'name 
"  socialist "  is  due  to  the  fact  that  it  has  in  practice  been  appropriated  by 
revolutionists  of  every  shade  of  economic  belief.  Working  side  by  side  and 
under  a  common  banner,  we  find  (i)  true  socialists,  whose  programme  con- 
templates an  increase  of  the  powers  of  the  general  government  :  (2)  com- 
munists, who  wish  the  local  governments  to  do  nearly  everything,  reducing 
to  a  minimum  the  powers  both  of  the  general  government  and  the  indi- 
vidual ;  (3)  anarchists,  who  distrust  all  governments,  local  as  well  as 
national,  and  wish  their  powers  reduced  to  a  minimum  ;  (4)  nihilists,  whose 
objections  to  the  existing  governments  are  so  great  that  they  do  not  think  it 
worth  while  to  delay  over  the  discussion  of  a  constructive  programme  in 
times  when  destructive  work  is  all-important. 

So  loosely  has  the  word  socialism  been  used,  that  non-revolutionary 
socialists  deem  it  necessary  to  distinguish  themselves  by  such  terms  as  "col- 
lectivists,"  "  nationalists,"  or  "  socialists  of  the  [professorial]  chair." 


356  MACHINERY  AND  LABOR, 

%  395'  With  the  leaders  of  the  new  unionism,  insurance 
and  benefit  systems  count  for  little  or  nothing.  They  are 
quite  ready  to  support  strikes  ;  they  are  even  more  ready 
to  engage  in  political  agitation.  They  believe  with  a 
great  deal  of  reason  that  they  are  stronger  politically 
than  they  are  industrially.  They  rely  less  on  the  power 
of  the  individual  strikers  to  enforce  their  demands,  and 
more  on  the  collective  power  to  influence  public  senti- 
ment and  legislation  which  is  possessed  by  laborers  as  a 
class.  They  think  that  the  growth  of  the  democratic 
spirit  in  politics  and  industry  has  left  the  older  trades- 
union  leaders  far  behind  the  times.  They  would  transfer 
the  field  of  conflict  from  the  place  where  capital  is 
strongest  to  the  place  where  numbers  are  strongest ;  from 
the  factory  to  the  polling  place,  from  the  counting  room 
to  the  council  chamber. 

§  396.  One  of  the  most  important  objects  which  the 
new  unionism  proposes  to  attain  is  the  enforcement  of 
compulsory  arbitration  in  lieu  of  protracted  strikes. 

In  spite  of  the  frequency  with  which  they  are  inaugu- 
rated, strikes  are  not  a  particularly  successful  means  of 
giving  force  to  the  demands  of  organized  labor.  The 
capitalist  is  usually  so  situated  that  he  can  await  the  issue 
of  a  conflict  with  less  suffering,  if  not  less  actual  loss,  than 
the  labor  union  which  seeks  to  fight  him.  He  can  main- 
tain his  family  in  comfort  from  the  savings  of  past  years, 
while  the  funds  of  the  laborers  that  oppose  him  are  gradu- 
ally exhausted  by  a  protracted  struggle.  He  can  keep 
large  masses  of  machinery  idle  through  the  exercise  of 
his  own  individual  will,  while  workmen  are  drifting  in 
from  other  districts  to  take  the  place  of  the  strikers.  The 
attempt  to  prevent  such  laborers  from  accepting  employ- 
ment is  beset  with  difficulty.  The  penalty  of  social  ostra- 
cism, which  is  the  most  powerful  one  that  strikers  have  at 
their  command,  may  suffice  to  control  the  supply  of  home 
labor,  but  it  does  not  stop  the  importation  of  laborers  from 


POSITION    TAKEN  BY  LABOR  LEADERS.  357 

other  places.  The  attempt  to  intimidate  the  new  men 
puts  those  who  practise  it  outside  of  the  pale  of  the  law 
and  alienates  public  sympathy  from  the  side  of  the 
strikers.  In  exceptional  cases,  where  the  wages  pre- 
viously paid  have  been  flagrantly  inadequate,  the  compe- 
tition of  other  capitalists  may  compel  an  employer  to  yield 
to  the  demands  of  the  strikers  in  order  to  prevent  large 
profits  from  going  into  other  hands ;  but,  except  in  these 
instances,  the  labor  leaders  are 'in  the  position  of  men  who 
are  attempting  to  corner  the  labor  market  with  inade- 
quate capital.  Such  a  policy  is  doomed  to  failure  in  the 
long  run. 

If,  however,  the  employer  can  be  prevented  from  pro- 
tracting the  dispute,  the  position  of  the  strikers  is  different. 
They  have  only  to  hold  together  for  a  short  time  in  order 
to  be  assured  of  success.  They  are  placed  on  the  kind 
of  vantage  ground  enjoyed  by  the  man  who  makes  a 
corner  in  wheat  when  a  large  number  of  people  have 
contracts  which  they  must  fulfil  within  a  limited  period 
(§  175).  This  is  the  most  potent  motive  with  those  who 
demand  compulsory  arbitration, 

§  397.  They  support  this  demand  with  strong  argu- 
ments. They  urge  that  the  capitalist  who  builds  a  rail- 
road must  undertake  to  serve  the  public  continuously. 
The  more  complete  the  monopoly,  the  greater  is  the  pub- 
lic necessity  for  uninterrupted  service.  This  public  need 
is  paramount  to  all  other  considerations.  The  capitalist 
should  not  be  allowed  to  withhold  the  necessary  service 
from  the  public,  merely  because  he  cannot  agree  with  his 
workmen  as  to  the  terms  of  payment.  If  a  railroad  com- 
pany professes  itself  unable  on  this  account  to  deliver 
goods  or  to  run  trains,  it  should  be  compelled  to  do  so  by 
public  authority.  If  it  pleads  inability  to  secure  labor  at 
fair  rates,  courts  of  arbitration  should  be  established  to 
decide  what  rates  are  fair 

§  398.  To  this  argument    there    is  an    equally  strong 


358  MACHINERY  AND  LABOR. 

reply.  If  capital  is  to  be  compelled  to  maintain  continu- 
ous service  on  terms  like  these,  it  will  be  difficult  to  find 
Investors  who  are  ready  to  put  their  money  into  business 
enterprises  which  are  subject  to  this  liability.  Such  an 
arrangement  as  the  one  proposed,  while  apparently  fair 
to  both  laborers  and  capitalists,  is  really  quite  one-sided. 
It  could  be  enforced  against  the  employer  but  not 
against  the  employee.  Laborers  cannot  be  compelled  to 
work  on  the  basis  of  an  arbitrator's  award.  They  have 
not,  as  a  rule,  property  enough  to  be  held  to  such  an 
agreement  by  the  threat  of  pecuniary  damages.  No  one 
would  put  them  in  prison  if  they  refused  to  accept  the 
rates  offered.  Even  if  they  could  be  thus  compelled  to 
work  against  their  own  will,  the  service  rendered  under 
such  terms  would  resemble  slave  labor,  and  might  become 
dangerous  alike  to  the  property  of  the  employer  and  to 
the  safety  of  the  public. 

If  capitalists  are  afraid  to  invest  their  money  in  new 
enterprises,  both  laborers  and  consumers  suffer  ;  the  con- 
sumer for  lack  of  new  sources  of  supply,  the  laborer  for 
lack  of  new  fields  of  employment.  The  loss  to  the 
laborer  from  this  cause  more  than  neutralizes  any  good 
which  he  may  have  obtained  from  the  temporary  enforce- 
ment of  his  demands  by  a  board  of  arbitrators.  This  is 
illustrated  by  the  history  of  the  years  1885  and  1886, 
when  the  industries  of  the  United  States  were  virtually 
under  a  regime  of  compulsory  arbitration.  The  Knights 
of  Labor  were  able  so  effectually  to  boycott  the  goods  of 
obnoxious  manufacturers  that  employers  were  forced  to 
submit  to  their  demands  in  this  matter  or  suffer  financial 
ruin.  A  boycott  was  a  far  more  formidable  weapon  than 
a  strike.  It  precipitated  a  contest  at  a  point  where  the 
laborers  enjoyed  the  advantage  which  is  possessed  by  the 
holder  of  ready  money  as  compared  with  the  man  who 
offers  specific  goods  or  services  for  sale.  The  holder  of 
money  can  find  new  places  to  buy  what  he  wants  far  more 


COMPULSORY  ARBITRATION.  359 

quickly  than  the  man  who  has  either  labor  or  goods  to 
sell  can  find  new  purchasers  to  take  them.  In  a  strike 
the  employer  had  the  money  and  the  laborers  the  com- 
modity. In  a  boycott  the  positions  were  reversed.  By 
refusing  to  buy  his  goods,  the  laborers  attacked  the  em- 
ployer at  his  weakest  point.  If  he  remained  unmoved  by 
their  refusal  to  purchase,  the  Knights  of  Labor  could  go 
to  the  dealers  who  handled  those  goods  and  threaten 
them  with  a  boycott  unless  they  supplied  themselves  from 
other  makers.  These  dealers  were  often  indisposed  to 
defy  such  a  threat  for  the  sake  of  another  man's  quarrel. 
Cut  off  from  his  markets,  the  employer  was  compelled  to 
submit  the  disputed  matters  to  arbitration.  Yet  the  re- 
sult was  by  no  means  advantageous  to  laborers  as  a  class. 
The  hands  of  the  capitalists  were  so  tied  that  productive 
industry  suffered  severely.  Compulsory  arbitration  cre- 
ated more  troubles  than  it  settled.  After  a  comparatively 
short  experience,  not  only  courts  and  capitalists,  but 
laborers  of  the  better  class,  united  in  condemning  the 
boycott  and  the  system  of  arbitration  enforced  by  its  use. 
It  may  be  objected  that  the  system  of  arbitration  as 
administered  by  the  Knights  of  Labor  was  a  one-sided 
one,  and  that  no  conclusion  can  properly  be  drawn  from 
such  an  instance  as  to  the  effect  of  equitable  arbitration 
under  public  authority.  But  reasons  have  been  already 
given  to  show  that  arbitration  under  public  authority  is 
likely  to  be  one-sided.  It  is  sought  by  the  laborers  and 
not  by  the  capitalists.  It  deals  with  conditions  which  are 
as  yet  unknown  and  cannot  be  predicted  with  assurance 
by  any  board  of  arbitrators.  If  the  decision  of  such  a 
board  is  unfavorable  to  the  workmen,  they  have  it  in 
their  power  to  nullify  it.  If  it  is  unfavorable  to  the  capi- 
talist, he  must  nevertheless  accept  it.  While  public  arbi- 
tration may  be  so  organized  as  to  avoid  intentional 
unfairness,  it  can  hardly  fail  to  be  one-sided  in  its  effects, 
because  we  can  enforce  it  against  one  party  and  not 
against  the  other. 


360  MACHINERY  AND  LABOR. 

§  399.  We  are  placed  in  an  awkward  dilemma.  If  we 
do  not  admit  the  principle  of  compulsory  arbitration  we 
are  liable  to  interruptions  of  public  service  at  points 
where  its  continuous  maintenance  is  essential  to  the  com- 
fort and  prosperity  of  the  community.  If,  on  the  other 
hand,  we  adopt  compulsory  arbitration  as  a  principle,  we 
are  liable  to  an  interruption  of  the  investment  of  capital 
where  it  is  essential  to  social  and  industrial  progress.  The 
public  is  the  sufferer  in  any  event.  We  cannot  assume, 
as  was  done  two  or  three  generations  ago,  that  a  conflict 
between  labor  and  capital  is  one  which  the  parties  imme- 
diately interested  may  be  left  to  settle  for  themselves. 
When  there  were  a  dozen  independent  capitahsts  and  a 
hundred  or  a  thousand  independent  laborers,  a  dispute 
between  an  employer  and  those  who  worked  for  him  was  a 
matter  of  very  little  pubhc  account.  But  where  the  com- 
bination of  capitalists  and  laborers  has  become  so  com- 
plete that  a  single  strike  may  interrupt  the  transportation 
service  of  a  whole  district  and  threaten  large  communities 
with  famine  and  suffering,  the  case  is  wholly  altered.  We 
are,  as  Jevons  says,  working  on  the  assumption  that  indi- 
viduals will  act  as  individuals,  when  in  point  of  fact  the 
exigencies  of  modern  industry  compel  them  to  act  in 
masses. 

§  400.  There  are  some  who  advocate  government  own- 
ership of  all  monopolies  as  the  only  way  out  of  this 
dilemma.  But  this  remedy  (aside  from  the  other  dangers 
connected  with  its  adoption,  which  will  be  discussed  in 
the  next  chapter)  is  by  no  means  certain  to  meet  the 
exigencies  of  the  case.  If  a  government  avoids  labor 
troubles  by  yielding  to  the  demands  of  the  organization 
in  every  instance,  the  want  of  discipline  resulting  from 
this  practice  will  be  serious  if  not  destructive.  We  shall 
live  under  the  rule,  not  of  the  people,  but  of  a  small  sec- 
tion of  organized  labor.  If,  on  the  other  hand,  govern- 
ment resists  the  demands  of  the  organization,  it  will  have 


LESSONS  DERIVED  FROM   STRIKES.  361 

no  means  for  maintaining  its  ground  which  will  prove 
much  more  effective  than  those  which  capitalists  now 
possess.  The  superior  respect  of  the  workman  for  a  gov- 
ernment agency  might  count  for-  something ;  but  our 
experience  with  railroads  which  are  operated  by  the 
United  States  Courts  under  receiverships,  shows  that 
government  authority  is  not  enough  to  prevent  strikes  in 
cases  of  serious  wage  disputes. 

§  401.  Fortunately,  the  practical  chance  of  escape  from 
our  dilemma  is  rather  better  than  the  theoretical  one. 
Every  strike  teaches  either  workmen  or  capitalists  some 
useful  lessons  for  the  future.  There  is  a  process  of 
natural  selection,  under  which  leadership,  both  in  organi- 
zations of  labor  and  organizations  of  capital,  must  come 
more  and  more  into  the  hands  of  men  who  are  competent 
to  exercise  it.  The  time  is  past  when  the  noisiest  orator 
can  control  the  labor  organization  or  when  the  closest- 
fisted  miser  can  succeed  in  the  management  of  capital. 
So  far  as  the  managers  on  either  side  become  in  the  true 
sense  leaders  of  men,  there  is  a  chance  for  reducing  labor 
disputes  to  a  minimum.  This  may  be  a  slow  and  unsatis- 
factory remedy  for  present  troubles  ;  but  it  is  the  only 
one  which  appears  to  promise  much  hope  of  permanent 
success. 

§  402.  Government  agencies  for  arbitration  can  be  ar- 
ranged either  to  help  or  hinder  this  consummation.  If 
they  are  so  organized  as  to  seem  to  give  the  laborer  rights 
which  cannot  be  put  in  force  without  public  disaster,  they 
will  simply  retard  progress  in  these  matters  by  invit- 
ing the  repetition  of  experiments  which  are  foredoomed 
to  failure.  If,  on  the  other  hand,  they  attempt  to  avoid 
trouble  by  giving  opportunities  for  mutual  understanding 
between  employer  and  employed,  and  aim  at  preventing 
disputes  rather  than  settling  them,  they  strengthen  the 
hands  of  those  who  are  really  competent  to  lead  the 
forces  on  either  side.     The  history  of  boards  of  arbitra- 


362  MACHINERY  AND  LABOR. 

tion,  both  in  Europe  and  America,  shows  how  little  can 
be  accomplished  by  the  exercise  of  political  authority 
after  a  fight  has  once  begun.  The  work  of  courts  of  con- 
ciliation, on  the  other  hand,  shows  how  much  can  be  done 
to  prevent  misunderstandings  which  lead  to  disputes,  if 
they  are  taken  in  hand  before  matters  have  reached  the 
stage  of  open  hostility.  The  French  Conseils  de  Prud' 
hotnmes  have  perhaps  furnished  the  best  though  by  no 
means  the  only  examples  of  what  can  be  done  by  courts 
of  industrial  conciliation. 

A  very  considerable  proportion  of  the  disputes  between 
labor  and  capital  may  be  characterized  as  wholly  unneces- 
sary. They  are  the  outcome,  not  of  direct  quarrels,  but 
of  misunderstandings.  The  employer  wants  to  do  one 
thing,  the  laborers  think  he  wants  something  else  ;  they 
object  to  the  latter,  and  he  believes  that  they  are  taking 
exception  to  the  former.  Or  it  may  happen  that  the  men 
protest  against  a  reduction  in  wages  without  knowing 
what  the  conditions  of  trade  really  warrant ;  the  employer 
insists  on  the  reduction  without  giving  facts  to  sustain  his 
position ;  the  workmen  strike  in  the  belief  that  he  is  wil- 
fully refusing  to  give  the  wages  they  demand,  when  the 
truth  is  that  he  is  prevented  by  sheer  inability.  After 
the  strike  is  once  inaugurated,  it  is  often  too  late  for  fur- 
ther explanations.  But  a  board  of  conciliation,  whether 
organized  by  the  government  or  by  the  voluntary  action 
of  employers  and  employed,  can  render  the  greatest 
service,  in  enabling  each  side  to  get  a  clear  understanding 
of  the  other's  position  before  matters  have  gone  so  far  as 
to  render  cool  action  on  the  basis  of  such  an  under- 
standing impossible. 

§  403.  If,  before  any  dispute  arises,  both  parties  can 
settle  upon  a  satisfactory  scheme  for  the  determination  of 
wages,  and  make  a  long-time  contract  on  this  basis,  it  pre- 
cludes much  of  the  danger  of  labor  troubles.  The  system 
which  has  seemed  best  adapted  to  this  end  is  known  as 


THE  SLIDING  SCALE.  363 

the  sliding  scale.  By  this  method  the  workman's  earnings, 
instead  of  being  made  proportionate  to  the  product,  as  in 
ordinary  piece-work,  are  made  to  depend  somewhat  upon 
its  selHng  price ;  the  rate  of  pay  increasing  as  the  price  of 
the  product  increases,  and  vice  versa.  It  has  been  ex- 
tensively applied  in  mining,  and  to  a  less  degree  in  some 
other  lines  of  industry.  Where  the  conditions  will  admit 
of  its  use,  it  has  a  decided  influence  in  preventing  labor 
troubles,  by  settling  in  advance  the  share  in  which  the 
laborer  and  capitalist  shall  divide  the  advantages  of  a 
rising  market  or  the  burdens  of  a  falling  one ;  nor  is  it, 
under  favorable  conditions,  so  complicated  as  to  give  rise 
to  misunderstanding  and  suspicion.' 

§  404.  From  the  employer's  standpoint  no  exception 
can  be  taken  to  the  principle  of  the  sliding  scale.  It 
undertakes  to  do  for  non-competitive  labor  what  economic 
forces  do  for  competitive  labor — to  give  the  workman  the 
total  value  of  what  he  makes,  less  a  deduction  for  the 
necessary  profits  of  capital.  But  from  the  workman's 
standpoint  there  is  always  a  possible  objection  which  may 
prove  very  serious.  What  if  the  price  of  the  product,  less 
the  necessary  deductions,  fails  to  give  him  the  income  he 
needs  in  order  to  keep  himself  and  his  family  alive? 
Looking  at  the  matter  from  this  side  he  proposes  another 
standard  as  a  basis  of  just  remuneration — the  standard  of 
the  living  wage.  According  to  this  view,  labor  should  be 
paid  enough  to  maintain  it  at  a  good  grade  of  efificiency ; 
the  amount  necessary  for  this  purpose  being  determined 
by  the  habits  of  life  of  the  workers  themselves.' 

'  If  we  go  one  step  farther,  and  give  the  workman,  in  addition  to  his 
wages,  an  interest  in  the  net  profits  of  tjje  business,  we  have  a  case  of  profit 
sharing.     The  operation  of  this  system  is  described  in  the  next  chapter. 

*  The  principle  of  the  living  wage  was  applied  in  England  in  past  centuries 
by  action  of  the  magistrates,  who  from  year  to  year  fixed  wages  as  low  as 
they  dared.  Even  this  minimum  is  thought  by  Webb  to  have  been  in  some 
degree  a  protection  to  the  laborer. 

The  present  bearings  of  the  agitation  for  a  living  wage  are  well  treated  by 
W.  Smart,  "Studies  in  Economics,"  London,  1895. 


364  MACHINERY  AND  LABOR. 

§  405.  The  question,  which  is  often  asked  and  seldom 
answered,  whether  labor  should  be  treated  as  a  mere  com- 
modity, is  simply  a^-hetorical  method  of  bringing  forward 
the  issue  between  the  principles  involved  in  the  "  sliding 
scale  "  and  the  "  living  wage  "  as  bases  of  determination 
of  just  payment. 

If  the  price  of  labor  is  determined  by  competition,  labor 
is  treated  as  a  commodity ;  if  it  is  determined  by  the 
needs  of  the  man  himself,  labor  is  not  treated  as  a  com- 
modity. If  arbitrators  act  on  the  principle  of  the  sliding 
scale,  they  commit  themselves  to  the  former  view  ;  if  they 
apply  the  principle  of  the  living  wage,  they  adopt  the  lat- 
ter. In  the  one  case,  they  allow  every  laborer  to  get  what 
he  can  ;  in  the  other,  they  forbid  the  laborer  to  take  less 
than  a  specified  sum,  even  though  the  refusal  should  force 
him  to  starve  or  at  any  rate  to  become  dependent  on  pub- 
lic support.  Either  alternative  involves  widespread  hard- 
ship, which  every  serious  student  of  the  problem  finds  it 
hard  to  contemplate.  Any  one  who  has  looked  at  the 
matter  in  all  its  difficulty  is  warranted  in  protesting 
against  the  uncritical  use  of  phrases  concerning  the  treat- 
ment of  labor  as  a  commodity,  which  have  the  effect  of 
prejudging  the  whole  case  by  placing  a  rhetorical  em- 
phasis on  the  evils  of  one  alternative  in  such  a  way  as  to 
preclude  dispassionate  consideration  of  the  relative  merits 
of  both. 

§  406.  There  is  no  doubt  about  the  possibility  of  apply- 
ing the  principle  of  the  living  wage  if  the  public  is  pre- 
pared to  take  the  consequences.  If  those  who  do  not 
earn  a  living  wage   are    left  to  starve,'   those  who    are 

'  This  danger  is  strikingly  exempHfied  if  we  examine  the  effect  of  profes- 
sional etiquette  upon  the  employment  of  men  who  are  just  making  their  start 
in  life.  Every  profession  has  its  customary  scale  of  charges  based  in  large 
measure  upon  the  supposed  cost  of  education  and  maintenance  of  men  who 
can  keep  a  high  standard  of  professional  attainment.  The  man  who  is  begin- 
ning life  is  not  allowed  to  underbid  his  established  competitor.  Without 
discussing  the  pros  and  cons  of  rigid  adherence  to  such  an  established  scale 


THE  LIVING    WAGE.  365 

more  efficient  can  get  what  they  demand.  But  this  is 
hardly  what  is  proposed  by  the  advocates  of  the  system. 
They  do  not  believe  that  the  consistent  adoption  of  their 
principle  would  result  in  any  considerable  amount  of  star- 
vation. Some  of  them  think  that  the  gain  to  society  in 
the  avoidance  of  disease  and  vagrancy,  of  prostitution  and 
crime,  which  would  result  from  paying  better  minimum 
wages,  would  more  than  compensate  any  deficiency  in  the 
value  of  the  product  of  those  whose  wages  were  raised. 
This  would  be  hard  to  prove ;  and  it  is  difBcult  to  see 
what  practical  measures  could  be  devised  for  testing  iti 
truth,  short  of  absolute  socialism.  Others,  probably  more 
numerous,  think  that  if  the  producers  only  stand  together 
they  can  dictate  prices  for  the  whole  amount  now  con- 
sumed and  get  higher  pay  by  simply  demanding  it.  But 
in  point  of  fact,  if  the  producer  dictates  the  price,  the  con- 
sumer responds  by  varjnng  the  amount  which  he  pur- 
chases. If  every  laborer  makes  his  product  worth  a  living 
wage  by  rendering  society  what  it  regards  as  an  equiva- 
lent for  the  food,  clothing,  fuel,  shelter,  and  other  things 
represented  by  that  wage,  he  can  get  it.  If  he  attempts 
to  insist  on  the  wage  while  not  rendering  the  equivalent — 
or,  what  amounts  to  the  same  thing,  rendering  that  which 
he  deems  an  equivalent  but  which  the  consumer  does  not 
— no  amount  of  combination  will  enable  him  to  enforce 
his  demands.  He  may  refuse  to  work  for  less  ;  he  cannot 
insist  on  being  employed  at  a  price  which  he  deems  fair, 
if  the  consumer  views  the  matter  otherwise. 

If  the  men  who  demand  a  "living  wage  "  are  prepared 
to  increase  their  working  efficiency  as  a  means  of  making 

of  charges,  it  is  enough  for  the  present  purpose  to*  point  to  the  hardships 
which  it  inflicts  upon  many  who  are  striving  to  maintain  a  foothold  in  medi- 
cine, in  law,  or  in  art.  Not  being  free  to  sell  his  work  for  what  the  public 
will  pay,  the  young  professional  man  in  the  majority  of  cases  finds  his  firsl 
years  marked  by  a  record  of  working-time  unemployed  except  so  far  as  he 
may  use  it  for  his  own  study,  and  of  wants  unsatisfied  except  so  far  as  he  cap 
meet  them  from  the  previous  accumulations  of  himself  or  of  his  friends. 


366  MACHINERY  AND  LABOR. 

good  their  claim,  their  demand  is  effective  in  securing  its 
object  and  salutary  in  its  influence  upon  industrial  life. 
But  to  believe  that  the  wages  can  be  paid  without  the 
work,  or  even  that  the  increased  efficiency  of  work  neces- 
sarily results  from  improvement  in  wages,  seems  a  danger- 
ous fallacy. 

§  407.  The  majority  of  trades-union  leaders  appear  to 
underrate  the  closeness  of  the  competition  of  capital  and 
the  narrowness  of  the  margin  of  profit.  They  do  not 
realize  how  closely  actual  piece  wages  have  been  forced 
up  to  the  limit  which  prices  will  allow.  They  believe  that 
more  is  to  be  expected  from  combination  of  labor  than 
from  competition  of  capital.  They  sometimes  support 
their  position  by  the  claim  that  machinery  has  destroyed 
competition  between  capitalists  and  allows  them  to  pay 
unfairly  low  wages.  We  have  seen  in  a  former  chapter 
(§§  176-180)  how  often  similar  statements  made  concern- 
ing the  effect  of  machinery  upon  consumers  have  proved 
to  be  exaggerated.  Even  where  the  individual  consumer 
is  not  well  protected,  the  general  rate  which  the  capitalist 
can  charge  is  limited  by  causes  less  obvious  than  imme- 
diate competition,  but  hardly  less  effective.  The  same 
thing  holds  true  in  regard  to  labor.  A  time  might  con- 
ceivably come  when  capitalists  would  be  closely  enough 
united  to  offer  labor  less  than  the  value  of  its  products, 
employ  a  few  laborers  at  that  rate,  leave  the  rest  to 
starve,  and  appropriate  the  large  margin  of  profit  to 
themselves ;  but  this  state  of  things  is  very  far  from  being 
realized  at  present.* 

§  408.  Under  these  circumstances  the  substitution  of  a 
bargain  between  united  labor  and  capital,  for  the  inde- 

'  The  common  assertion  that  competition  is  more  intense  as  the  number  of 
competitors  becomes  greater,  seems  to  be  a  loose  inference  from  the  fact  that 
prices  are  apt  to  be  higher  as  the  demand  for  an  article  becomes  greater.  It 
is  easy  to  see  that  these  two  things  really  have  nothing  to  do  with  one 
another.  As  a  rule,  the  closest  competition  is  that  which  prevails  between 
two  well  matched  rivals. 


LABOR  MONOPOLIES.  367 

pendent  competition  of  laborers  and  capitalists  with  one 
another,  could  hardly  prove  a  gain  to  the  laborer.  In 
a  bargain,  the  capitalist's  superior  strength  and  intelli- 
gence must  tell  against  the  laborer.  In  competition,  the 
laborer  has  the  advantage  of  the  strength  and  intelligence 
of  different  capitalists  to  secure  him  a  market  rate  of 
wages.  In  trying  to  substitute  the  former  system  for  the 
latter,  the  workman  foregoes  the  advantage  which  he 
receives  from  the  strength  of  the  capitalists  in  a  competi- 
tion, and  submits  to  the  disadvantage  which  this  strength 
imposes  upon  him  in  a  contest  of  wits  or  endurance. 

§  409.  He  finds  himself  at  an  equally  serious  disad- 
vantage in  attempting  to  set  a  monopoly  price  on  labor, 
and  to  reduce  the  supply  as  a  means  of  maintaining  the 
price  thus  fixed.  We  have  seen  how  universal  is  the  fail- 
ure of  combinations  of  capitalists  when  they  attempt  to 
carry  out  this  policy.  Where  the  capitalists  fail,  with 
every  advantage  in  their  favor,  it  is  hardly  to  be  expected 
that  the  labor  organizations  should  succeed.  The  gilds 
were  unable  to  maintain  a  labor  monopoly  ;  and  the  gilds 
had  many  circumstances  on  their  side  which  modern 
labor  organizations  have  not.  To  begin  with,  they  did 
not  pretend  to  care  for  the  interests  of  labor  in  general ; 
they  were  occupied  with  securing  special  advantages  for 
their  own  labor.  Moreover  they  had  the  full  support  of 
the  ruling  powers.  Their  interests  were  in  many  respects 
identical  with  those  of  the  landowners,  who  possessed 
dominant  political  authority.  The  landowners  wanted 
agricultural  wages  low ;  the  gilds  wanted  municipal  wages 
high.  Both  objects  could  be  accomplished  by  a  policy 
which  kept  large  numbers  of  laborers  in  the  country  and 
prevented  them  from  flocking  to  the  towns.  Accordingly 
we  find  that  gilds  and  landowners  worked  in  harmony  in 
most  measures  of  industrial  legislation.  Almost  all  chance 
of  bettering  his  condition  was  cut  off  from  the  agricultural 
laborer  by  acts  of  settlement,  which  prevented  his  moving 


368  MACHINERY  AND  LABOR. 

from  one  parish  to  another  unless  he  could  give  the 
authorities  in  his  new  home  satisfactory  assurance  that 
he  would  not  become  a  burden  on  the  rate  payers.  The 
consequence  was  that  an  over-supplied  labor  market  in 
one  district  could  not  find  rehef  by  migration  to  another 
and  possibly  more  favorable  farming  region.  Change  of 
occupation  was  yet  more  effectively  cut  off  from  the 
farmer's  son  by  restrictions  on  the  right  to  exercise  a  trade. 
Under  the  pretext  of  compelling  a  workman  to  learn  a 
trade  thoroughly,  the  statutes  of  apprenticeship  were 
often  used  to  prevent  most  applicants  from  entering  it  at 
all  and  to  force  those  who  did  enter  to  become  rigidly 
bound  down  to  antiquated  methods.  All  these  measures 
helped  the  leaders  of  the  gild  to  limit  the  labor  supply  in 
their  several  trades.  But  no  monopoly,  however  fortified 
by  traditional  rights  and  political  alliances,  could  prosper 
by  refusing  to  do  public  service ;  and  as  soon  as  Europe 
became  peaceful  enough  to  admit  of  investments  of  capi- 
tal, the  industrial  power  passed  from  gilds  who  were 
trying  to  restrict  production,  to  capitalists  who  were 
ready  to  increase  it, 

§  410.  The  political  position  of  the  modern  labor  or- 
ganization is  so  much  less  strong  than  that  of  the  gild, 
that  its  mistakes  are  not  likely  to  be  so  wide-reaching  in 
their  consequences.  But  the  same  tendencies  which  made 
the  gilds  a  burden  on  society  show  themselves  in  the 
management  of  trades-unions ;  and  this  is  the  chief  reason 
why  thoughtful  men  look  on  these  organizations  with  so 
much  distrust.  It  is  not  because  they  promote  strikes, 
but  because  they  discourage  industrial  efficiency.  This 
is  not  true  of  all  unions,  but  it  is  unfortunately  true  of  a 
very  large  number.  They  seek  their  interest,  not  in 
doing  as  much  as  possible,  but  in  doing  as  little  as  pos- 
sible. Instead  of  trying  to  make  their  members  useful  to 
capitalists  and  consumers  alike,  they  undertake  to  drive  a 
bargain  with  the  capitalist,  and  they  thereby  antagonize 


DANGERS  OF  SLOW   WORK.  369 

the  interests  of  the  consumer.  While  they  honestly 
attempt  to  promote  good  work,  the}''  are  yet  more  occu- 
pied with  promoting  slow  work.  Such  a  policy  not  only 
gives  society  short  service,  but  handicaps  the  strong  men 
who  would  otherwise  take  the  lead  in  industrial  progress. 
Until  the  representatives  of  organized  labor  recognize 
the  evils  involved  in  this  course,  the  dangers  involved  in 
labor  organizations  are  likely  to  outweigh  their  possi- 
bilities of  good. 


CHAPTER  XII. 

COOPERATION. 

Profit-Sharing — Producers'  Cooperation — Forms  of  Consumers'  Cooperation 
— Government  Management  of  Industrial  Enterprises. 

D.  F.  Schloss :  "Methods  of  Industrial  Remuneration."  London  and 
New  York,  1892. 

N.  P.  Gilman  :  "  Profit-Sharing  between  Employer  and  Employee.'' 
Boston,  1889. 

G.  J.  Holyoake  :  "  The  History  of  Cooperation  in  England."  London, 
1875,  1879. 

[Johns  Hopkins  University]  "  History  of  Cooperation  in  the  United 
States."     Baltimore,  i838. 

§  411.  The  relation  between  labor  and  capital  is  most 
satisfactory  when  there  is  no  sharp  separation  into  classes ; 
where  many  of  the  capitalists  have  risen  from  the  ranks 
of  labor,  and  many  of  the  laborers  themselves  hope  to 
become  capitalists.  Under  such  circumstances  we  have 
every  stimulus  for  efificient  production,  and  little  or  no 
opportunity  for  misunderstandings  and  conflicts.  It  is 
this  state  of  things,  quite  as  much  as  the  abundance  of 
free  land,  which  gives  the  inhabitants  of  a  new  country 
their  economic  advantages. 

§412.  Unfortunately,  this  condition  is  far  from  being 
realized  in  Europe  in  the  nineteenth  century ;  and  America, 
though  better  off  than  Europe,  is  making  progress  in  the 
wrong  direction.  The  business  men  in  the  present  genera- 
tion have  in  large  part  risen  from  the  ranks  of  labor  to 
their  existing  position  of  leadership  ;  but  whether  the  same 

370 


SEPARATION  OF  LABOR  AND   CAPITAL.  371 

thing  can  be  predicted  for  the  next  generation  is  very 
doubtful.  Certain  it  is  that  the  prospect  of  becoming 
capitalists  does  not  act  as  so  powerful  a  motive  on  the 
laborers  of  to-day  as  it  did  on  those  of  a  generation  ago. 
The  opportunities  to  save  are  as  great  or  greater ;  but  the 
amount  which  has  to  be  saved  before  a  man  can  hope  to 
become  his  own  employer,  has  increased  enormously. 
When  a  man  who  had  accumulated  a  thousand  dollars 
could  set  up  in  business  for  himself,  the  prospect  of  inde- 
pendence appealed  to  him  most  powerfully ;  when  he  can 
do  nothing  but  lend  it  to  some  richer  man,  the  incentives 
and  ambitions  connected  with  saving  are  far  weaker — too 
weak,  in  many  cases,  to  lead  the  man  to  save  at  all,  ex- 
cept through  the  medium  of  a  friendly  society  or  trades- 
union.  We  thus  have  a  separation  of  the  community 
into  more  and  more  rigidly  defined  groups,  different  in 
industrial  condition,  distinct  in  ideals,  and  oftentimes 
antagonistic  in  their  ambitions  and  sympathies.  This 
separation  of  laborers  and  capitalists  into  distinct  classes 
involves  serious  dangers  to  society  as  a  whole. 

1.  It  increases  the  liability  of  industrial  conflicts,  pro- 
ducing strikes  and  lockouts,  which  throw  laborers  out  of 
employment  and  machinery  out  of  productive  use.  The 
harm  done  by  these  conflicts  is  by  no  means  confined  to 
the  individual  contestants,  but  may  occasion  misfortune 
to  the  whole  body  of  consumers. 

2.  It  neutralizes  a  large  part  of  the  advantages  of  the 
institution  of  private  property.  If  a  laborer  does  not  ex- 
pect to  accumulate  money  and  become  a  property  owner, 
he  loses  an  incentive  to  hard  and  eflficient  work  which 
makes  his  service  most  valuable  to  society. 

3.  It  involves  a  contradiction  between  our  political 
theories  and  the  facts  of  industrial  life.  A  republican 
government  is  organized  on  the  assumption  that  all  men 
are  free  and  equal.  If  the  political  power  is  thus  equally 
distributed  while  the  industrial  power  is  in  the  hands  of  a 


372  COOPERA  TION. 

few,  it  creates  danger  of  class  struggles  and  class  legisla- 
tion which  menace  both  our  political  and  our  industrial 
order. 

§  413.  Some  look  for  the  solution  of  these  difificulties 
in  a  paternal  policy  on  the  part  of  employers  toward  those 
whom  they  employ.  It  is  said,  with  a  fair  measure  of 
truth,  that  much  of  the  existing  industrial  friction  arises 
from  the  fact  that  men  are  treated  as  machines.  The 
employer  tries  to  make  as  good  a  bargain  with  his  work- 
men as  he  can,  and  does  nothing  more  than  this.  It  is 
urged  that  manufacturers  should  make  provision  for  the 
well-being  of  their  operatives  by  public  improvements,  by 
the  erection  of  sanitary  dwellings,  by  the  establishment  of 
insurance  funds,  and  by  a  number  of  other  agencies  which 
shall  bind  the  interests  of  labor  and  capital  together. 
Much  good  can  undoubtedly  be  done  in  this  way.  We 
see  this  exemplified  in  an  institution  like  the  familistere 
at  Guise  or  in  some  of  the  factory  towns  of  the  United 
States  where  the  capitalists  have  taken  a  living  interest  in 
the  welfare  of  their  employees.  But  the  remedy  is  by  no 
means  a  sure  one.  The  modern  workman  is  apt  to  chafe 
under  the  feeling  that  his  insurance  funds  are  in  the  hands 
of  his  employer.  Nor  does  he  always  like  to  live  in  houses 
owned  by  the  corporation  for  which  he  works,  even  when 
such  houses  are  well  built  and  rented  at  a  fair  price. 
There  is  a  feeling  of  dependence  which  often  proves  irk- 
some, and  may  give  rise  to  serious  misunderstanding. 
Events  like  the  Pullman  strike  of  1894  show  the  dangers 
to  which  a  system  of  this  kind  is  liable.  And  even  when 
these  experiments  are  thoroughly  successful,  they  only 
touch  the  surface  of  the  difficulty.  They  meet  the  first 
of  the  evils  enumerated,  but  not  the  second  and  the  third. 
They  diminish  the  possibility  of  open  warfare  between 
laborer  and  employer ;  but  they  do  not,  to  any  conspicu- 
ous degree,  arouse  the  ambition  of  the  laborer  or  avoid 
the  conflict  between  industrial  facts  and  political  theories. 


V 

4r 


PROFIT-SHARING.  373 

Indeed,  the  system  of  paternal  care  and  provision,  unless 
administered  Avith  the  utmost  wisdom,  leads  to  flagrant 
violations  of  the  modern  doctrine  of  social  equality. 

§  414.  Another  way  of  meeting  these  dangers  is  by 
encouraging  workmen  to  become  owners  of  stock  in  the 
companies  for  which  they  work.  Many  employers  give 
their  hands  every  facility  for  thus  becoming  stockholders, 
on  terms  more  favorable  than  those  which  are  open  to  the 
general  public.  Such  employers  believe,  and  with  a  great 
deal  of  reason,  that  the  gain  to  the  company  in  assuring 
itself  of  the  devotion  of  its  men,  is  one  which  will  more 
than  balance  an  apparent  loss  of  money  on  the  sale  of  the 
stock.  But  a  measure  of  this  kind,  though  good  as  far  as 
it  goes,  is  somewhat  limited  in  its  application.  It  is  a 
difficult  one  to  put  in  practice  where  the  concern  is  so 
large  that  the  employer  does  not  come  into  direct  contact 
with  his  hands  ;  for  in  the  absence  of  such  contact,  the 
privilege  of  buying  stock  at  less  than  market  rates  is 
almost  certain  to  be  abused.  It  is  thus  inapplicable  in 
just  those  cases  where  a  remedy  for  labor  troubles  is  most 
needed.  Nor  does  it,  in  any  real  sense,  make  the  work- 
man his  own  employer.  It  gives  him  a  fractional  share  in 
electing  the  people  who  say  how  he  is  to  be  employed — a 
very  different  thing,  both  in  theory  and  in  fact,  and  one 
which  is  far  from  putting  the  laborer  in  a  position  of 
independence. 

§  415.  A  third  remedy,  which  has  a  little  wider  applica- 
tion, is  found  in  profit-sharing.  Under  this  system  the 
workman,  in  addition  to  his  regular  wages,  receives  a 
dividend  from  the  net  profits  of  the  business  in  which  he 
is  employed.  This  stimulates  him  to  make  the  interests 
of  the  employer  his  own,  and  gives  him,  in  some  measure 
at  any  rate,  the  ambitions  and  motives  of  a  property 
owner.  This  plan  was  brought  prominently  into  notice 
by  the  success  of  Leclaire,  a  Parisian  house  decorator, 
who  adopted  it  in  1842  and  placed  it  on  a  permanently 


374  COOPER  A  TION. 

efficient  basis,  making  his  own  fortune,  as  well  as  that  of 
many  of  his  workmen,  by  its  results.  Profit-sharing  has 
been  carried  on  with  a  fair  measure  of  success  by  many 
other  houses  in  France,  particularly  since  1870,  as  well  as 
in  Switzerland  and  in  Germany.  In  England  and  in  the 
United  States  the  results  have  not  been  so  good.  Though 
we  find  some  isolated  instances  of  successful  profit-sharing, 
the  system  has  not  proved  its  power  to  stand  a  severe 
strain  or  to  prevent  the  occurrence  of  destructive  strikes. 
§  416.  The  most  noted  experiment  in  profit-sharing  in 
England  was  that  of  the  Briggs  collieries,  near  Leeds.  Its 
apparent  success  was  so  great  that  Jevons  at  one  time  pro- 
nounced it  a  decisive  proof  of  the  ability  of  the  system  of 
profit-sharing  to  accomplish  what  its  advocates  claimed. 
But  in  1875,  under  the  stress  of  hard  times,  the  whole 
scheme  was  wrecked.  As  long  as  trade  was  prosperous 
and  wages  were  advancing,  all  went  well.  But  when 
trade  conditions  changed,  the  men  struck  against  reduc- 
tions in  wages.  The  wage  dispute  was  referred  to  arbitra- 
tion, and  the  arbitrator  decided  in  favor  of  the  employers. 
But  the  experiment  in  profit-sharing  was  at  an  end.  The 
bulk  of  the  shareholders  objected  to  the  continuance  of  a 
system  under  which  they  shared  profits  with  their  work- 
men, but  which  did  not  make  those  workmen  any  more 
ready  to  share  losses  or  prevent  them  from  resorting  to 
the  old  method  of  warfare  between  capital  and  labor, 
which  it  was  confidently  hoped  that  industrial  partnership 
had  forever  banished.  Various  explanations  have  been 
given  of  the  failure  of  this  experiment.  It  is  said  that 
while  the  Briggs  family  were  heartily  and  loyally  in  favor 
of  the  system  of  profit-sharing,  the  outside  stockholders, 
who  owned  a  majority  of  the  capital  of  the  concern,  were 
not.  It  is  also  stated  that  serious  mistakes  of  policy  were 
iHade  during  the  years  of  great  industrial  prosperity,  by 
which  the  success  of  the  enterprise  was  unnecessarily 
endangered.     Even  granting  the  truth  of  all  this,  it  is 


DIFFICULTIES  OF  PROFIT-SHARING.  375 

clear  that  the  system  did  not  do  what  was  expected  of 
it.  It  did  not  prevent  a  strike  on  the  first  occasion  when 
its  usefulness  was  put  to  any  serious  test.  The  claim 
that  the  experiment  would  have  been  continued  if  the 
bulk  of  the  shareholders  had  been  sympathetically  in- 
terested in  its  success,  is  a  virtual  admission  that  it  did 
not  succeed  when  judged  on  business  principles  alone. 
The  fact  is  that  the  workmen  did  not  heartily  care  for  it. 
They  were  glad  to  see  it  in  operation  when  it  increased 
their  wages  ;  but  the  past  experience  and  future  anticipa- 
tion of  its  benefits  did  not  enlist  them  in  its  support 
strongly  enough  to  prevent  a  strike  when  there  appeared 
to  be  a  prospect  of  present  gain  by  the  employment  of 
that  means.  A  similar  comment  may  be  made  on  the 
failure  of  an  almost  equally  noted  American  experiment 
— that  of  Brewster  &  Co.,  in  carriage  manufacturing.  For 
two  or  three  years  the  employees  enjoyed  the  increase  of 
wages  which  the  system  afforded  them,  but  they  could  not 
resist  the  pressure  which  their  fellow  workmen  brought 
to  bear  upon  them  to  enter  upon  an  ill-advised  and  unjus- 
tified conflict  with  their  employers. 

§  417.  There  has  been  a  sufficient  number  of  success- 
ful experiments  in  profit-sharing  to  turn  the  hopes  of 
many  economic  reformers  in  this  direction.  But  it  must 
be  confessed  that  it  has  accomplished  far  less  than  its 
advocates  have  prophesied,  and  perhaps  less  than  the 
majority  of  unprejudiced  critics  were  disposed  to  antici- 
pate. There  are  reasons  which  do  not  appear  on  the 
surface,  which  too  often  make  the  expected  benefits  prove 
illusory. 

If  it  were  true,  as  many  people  suppose,  that  ordinary 
business  offered  a  large  surplus  of  profit,  which  would 
give  room  for  the  distribution  of  a  handsome  addition  to 
the  workman's  wages  without  involving  the  employer  in 
bankruptcy,  there  would  be  a  better  chance  to  apply  the 
system  of  profit-sharing  as  a  panacea  for  labor  troubles. 


3  76  coOpera  tion. 

But  we  have  seen  that  this  is  far  from  being  the  case. 
The  competition  of  capitaHsts  with  one  another  has  in 
the  majority  of  cases  cut  down  profits  to  so  low  a  figure 
as  to  leave  little  if  any  room  to  increase  wages  at  the  ex- 
pense of  the  employer.  If  the  laborer  is  to  receive  a  bonus 
in  addition  to  his  wages,  one  of  two  things  must  happen. 
Either  his  efficiency,  care,  and  steadiness  must  be  so  in- 
creased as  to  create  the  additional  profit  from  which  this 
bonus  is  paid ;  or  he  must  be  prepared  to  accept  a  lower 
minimum  wage  to  compensate  for  his  chance  of  a  higher 
maximum,  and  leave  the  average  where  it  now  is. 

§  418.  The  advocates  of  profit-sharing  generally  accept 
the  former  alternative.  They  believe  that  the  laborer,  in 
a  profit-sharing  industry',  will  do  more  work,  exercise  more 
care,  and  abstain  more  surely  from  labor  disputes  than  he 
would  under  the  traditional  wage  system  ;  and  that  in  this 
way  he  will  create  the  profit  to  be  divided.  The  facts 
hardly  warrant  this  belief,  especially  in  the  case  of  the 
American  workman.  In  the  list  of  profit-sharing  indus- 
tries, one  of  the  most  conspicuous  features  is  the  large  pro- 
portion of  them  which  report  no  profit  to  divide.'  Nor  is 
this  to  be  wondered  at.  In  the  complicated  industry  of 
modern  times,  the  connection  between  the  individual  effort 
of  a  single  workman  and  the  general  profit  of  the  business 
as  a  whole  is  too  remote  to  act  as  a  very  powerful  stimulus. 
If  all  the  operatives  simultaneously  can  be  nerved  to  a 
higher  degree  of  effort  or  of  care,  the  results  will  unques- 

'  It  should  also  be  remembered  that  these  lists,  from  the  very  nature  of 
the  case,  make  the  percentage  of  successes  appear  too  large.  The  records 
of  failure  are  never  as  well  preserved  as  those  of  success.  The  successful 
experiments  of  the  last  ten  years  can  be  tabulated  with  tolerable  complete- 
ness. They  are  known,  and  their  promoters  are  anxious  to  have  them  known. 
The  failures  are  far  harder  to  discover  and  tabulate.  They  are  forgotten, 
and  their  promoters  are  anxious  to  have  them  forgotten.  It  is  very  difficult 
to  hear  about  experiments  which  were  quietly  abandoned  five  or  ten  years 
ago,  unless  there  were  some  unusual  conditions  in  their  history  which  placed 
their  failure  on  record  at  the  time. 


WHEN  PROFIT-SHARING  CAN  SUCCEED.  2)77 

tionably  be  gratifying.  But  if  many  of  them  are  already 
working  up  to  the  limit  of  their  powers  either  in  the  mat- 
ter of  output  or  of  economy,  there  is  no  chance  for  such 
general  improvement.  The  gain  from  the  increased  effi- 
ciency of  any  individual  will  be  distributed  among  those 
who  have  done  comparatively  little  to  deserve  it.  The 
smallness  of  the  quotient  and  the  inequity  of  distribution 
both  interfere  with  the  attainment  of  good  results  from 
the  system.  They  may  do  even  worse  than  this.  If  a 
man  has  worked  much  harder  than  before  and  received 
little  or  no  increase  of  pay,  he  is  sometimes  in  danger  of 
suspecting  the  good  faith  of  his  employer.  Even  if  he 
has  access  to  the  employer's  books,  he  has  not  the  knowl- 
edge of  bookkeeping  which  would  enable  him  to  test  the 
conclusiveness  of  what  they  show.  Where  there  are  no 
profits  to  divide,  the  system  of  profit-sharing  may  breed 
those  very  misunderstandings  between  capital  and  labor 
which  it  is  designed  to  prevent. 

§  419.  Where  the  laborers  under  the  old  wage  system 
are  not  working  up  to  a  high  standard  of  efficiency,  there 
is  more  chance  for  the  success  of  profit-sharing.  This 
seems  to  be  the  reason  why  it  works  better  on  the  Conti- 
nent than  in  England,  and  better  in  England  than  in 
America.  There  is  a  greater  chance  for  increase  in  the 
general  output  in  those  countries  where  the  men  have 
habitually  been  working  far  below  their  physical  capacity ; 
and  profit-sharing,  like  anything  else  which  contributes  to 
such  an  increase,  is  a  first-rate  thing  for  the  workmen. 

§  420.  Profit-sharing  without  such  probable  increase  of 
output  must  be  unqualifiedly  condemned.  It  makes  the 
workman  a  sharer  in  gains  and  losses  which  are  essentially 
speculative  in  their  character.  For  it  must  be  remembered 
that  only  a  part,  and  not  the  larger  part,  of  the  variations  in 
profit  is  due  to  variations  in  cost  of  production.  Most  of 
these  variations  are  due  to  changes  in  the  selling  price  of 
the  product — a  thing  over  which  the  workman  hcis  no  con- 


378  COOPERA  TION. 

trol  whatever.  To  make  his  wages  depend  on  net  profits, 
under  these  circumstances,  is  to  force  him  to  participate 
in  the  speculations  of  his  employer — a  result  neither 
equitable  as  between  individuals  nor  desirable  for  society 
as  a  whole.' 

§421.  To  avoid  this  difficulty,  the  attempt  is  some- 
times made  to  determine  how  much  of  the  gain  in  a 
business  is  due  to  the  work  of  the  operatives,  and  how 
much  to  the  speculative  power  of  the  capitalists  and  their 
representatives  ;  crediting  the  operatives  with  the  profit 
under  the  former  head,  and  not  making  them  liable  to  the 
contingencies  which  affect  the  latter.  Sometimes  this  is 
accomplished  by  premiums  on  coal  economy,  such  as  are 
offered  by  certain  railroad  companies ;  sometimes  by  a 
carefully  arranged  computation  of  expenses,  under  which 
a  bonus  can  be  added  to  the  regular  wages  of  the  opera- 
tives in  case  the  normal  standard  of  cost  is  diminished. 
The  chief  difficulty  of  these  computations  is  found  in 
their  complexity.  It  is  hard  to  ascertain  which  items  of 
expense  should  be  charged  to  the  labor  cost  of  a  product ; 
it  is  perhaps  equally  hard  to  persuade  the  laborers  that 
the  employer  is  accurately  following  out  the  apportion- 
ment on  which  he  has  agreed. 

*  "  It  is  quite  possible  that  the  workman  who,  in  the  hope  of  earning 
'  bonus  to  labor,'  has  done  work  10  per  cent  in  excess  of  the  normal  standard, 
may,  even  under  a  liberal  scheme  of  profit-sharing,  find  that,  instead  of 
receiving  an  addition  to  his  normal  wages  of,  say  5  per  cent,  the  bad  manage- 
ment of  his  employer  has  reduced  his  boinis  to  so  low  a  level  that  he  has 
to  be  content  with  a  supplement  equivalent  to  only  2  per  cent  on  his  wages, 
or  that  no  bonus  whatever  is  available.  If  I  am  to  do  10  per  cent  more  and 
better  work  than  I  did  last  year,  why  not  offer  me  a  10  per  cent  increase  in 
my  wages,  subject  only  to  its  being  shown  that  my  work  exhibits  a  10  per 
cent  improvement?  Why  tempt  a  working-man  to  gamble  by  staking 
part  of  the  reward  of  his  labor  upon  the  financial  results  of  a  business  over 
the  conduct  of  whose  financial  operations  he  is  not  allowed  to  possess  any 
control,  and  would,  perhaps,  seldom  be  competent,  even  if  he  were  allowed, 
to  exercise  any  useful  control?"  (Schloss,  "Methods  of  Industrial 
Remuneration,"  pp.  189,  190.) 


ASSOCIATIONS  OF  PRODUCERS.  379 

§  422.  A  more  radical  reform  in  the  condition  of  the 
employees  is  contemplated  by  the  advocates  of  co- 
operation. 

Cooperation  is  often  confounded  with  profit-sharing; 
but  the  two  things  are  radically  distinct  in  their  nature. 
Profit-sharing  is  a  change  in  the  method  of  payment, 
which  is  intended  to  induce  the  workman  to  identify  his 
own  interests  with  those  of  his  employer,  but  which 
leaves  the  direction  and  management  of  the  Industry 
unaltered.  Cooperation,  on  the  other  hand,  involves  a 
change  of  management.  A  cooperative  enterprise  is  con- 
trolled, not  by  the  representatives  of  the  investor,  but  by 
the  representatives  either  of  the  laborers  or  of  the  con- 
sumers. In  the  former  case  it  is  known  as  productive  co- 
operation ;  in  the  latter,  as  distributive  or  consumptive 
cooperation. 

§  423.  The  history  of  productive  cooperation  goes  back 
to  a  very  early  period.  The  mediaeval  gilds  were  co- 
operative enterprises.  They  were  managed,  not  by  cap- 
italist employers,  but  by  associations  of  workmen  who 
contributed  from  their  own  funds  whatever  capital  was 
required  for  the  conduct  of  the  industry.  But  their  con- 
servatism of  method  led  to  their  displacement  by  capital- 
istic industry ;  and  it  is  not  until  about  the  middle  of  the 
present  century  that  we  find  widespread  attempts  to  re- 
establish the  system  of  cooperative  association.  Many 
cooperative  societies  were  established  in  France  in  con- 
nection with  the  revolution  of  1848.  Unfortunately, 
these  enterprises  were  directed  by  popular  enthusiasm 
rather  than  by  careful  business  calculation.  A  few, 
notably  among  masons  and  piano  makers,  were  successful. 
The  majority  were  total  failures.  Those  which  survived 
have  as  a  rule  abandoned  the  cooperative  form  and  have 
become  joint  stock  companies  owned  by  workmen.  More 
recent  French  cooperative  movements,  though  often  dis- 
cussed in  economic  literature,  do  not  appear  to  possess 


380  .    COOPERATION. 

great  industrial  importance.  A  number  of  English  ex- 
periments in  cooperative  production  were  made  in  cotton 
manufacturing  between  1850  and  i860.  But  the  difficul- 
ties consequent  upon  the  American  civil  war  ruined  most 
of  these  enterprises,  nor  have  they  subsequently  been 
revived  on  any  large  scale.  Of  American  attempts  in  pro- 
ductive cooperation  the  most  conspicuous  instance  has 
been  furnished  by  the  coopers  of  Minneapolis.  A  num- 
ber of  journeymen  organized  a  shop  of  their  own  in  1868, 
which  has  extended  its  work  from  year  to  year  and  has 
found  many  imitators.  Its  methods  have  been  admirable, 
its  credit  high,  and  it  has  had  the  effect  of  developing 
business  capacity  in  men  who  were  not  aware  that  they 
possessed  it.  There  have  been  also  instances  of  success- 
ful organizations  of  this  sort  among  wood-workers  in  St. 
Louis  and  among  boot  and  shoe  companies  in  Massa- 
chusetts. But  the  whole  number  is  small  in  proportion 
to  the  amount  that  has  been  said  about  them. 

§  424.  It  is  always  doubtful  whether  the  operatives  will 
choose  as  good  a  manager  as  the  stockholders  of  a  cor- 
poration, or  whether  the  manager  whom  they  choose  can 
enforce  good  discipline  among  those  on  whom  he  depends 
for  his  place.  It  is  often  hard  for  workmen  to  realize  the 
value  of  the  services  of  a  responsible  and  efficient  man- 
ager. They  are  not  willing  to  pay  him  a  high  salary ; 
and  this  false  economy  too  often  wastes  more  money  than 
it  saves.  The  lines  of  business  in  which  productive  co- 
operation is  most  successful  are  those  of  comparatively 
simple  character,  where  industry  counts  for  most  and 
management  for  least ;  where  the  connection  between  the 
efficiency  of  the  labor  and  its  result  is  most  obvious,  and 
where  the  necessity  for  organizing  power  and  speculative 
foresight  are  reduced  to  a  minimum.  In  such  industries 
the  superior  ambition  of  a  workman  who  feels  that  he  is 
his  own  employer  may  stimulate  him  to  an  increased 
amount  of  work  and  increased  care  in  the  use  of  materi- 


LASSALLE'S  PLAN.  38 1 

als,  which  will  outweigh  any  lack  of  speculative  skill. 
This  is  conspicuously  the  case  in  the  countries  of  Conti- 
nental Europe,  where  the  ordinary  standard  of  work  is  so 
low  as  to  leave  great  room  for  gain  in  those  directions. 
The  more  completely  the  workman  is  in  the  habit  of 
utilizing  his  powers  under  the  old  system,  the  less  chance 
is  there  for  gain  under  the  new.  For  this  reason  the 
United  States  furnishes,  in  some  respects,  the  le^st  prom- 
ising field  for  enterprise  of  this  kind. 

§  425.  It  is  believed  by  many  socialists  that  the  chief 
present  hindrance  to  productive  cooperation  is  the  diffi- 
culty which  workmen  meet  in  their  efforts  to  obtain 
capital.  An  association  of  laborers  cannot  work  to  the 
best  advantage  unless  it  controls  modern  machinery  ;  and 
modern  machinery  costs  a  great  deal  of  money.  Ferdi- 
nand Lassalle  proposed  that  the  government  should  meet 
this  difficulty  by  advancing  capital  to  associations  of 
workmen,  who  would  guarantee  to  make  good  its  value 
at  the  close  of  the  period  of  production.  In  this  way  he 
thought  that  the  present  monopoly  of  capitalists  in  the 
control  of  industry  would  be  abolished.  A  man  who  had 
no  capital,  but  was  willing  to  work,  would  be  put  on  an 
equality  with  one  who  had  inherited  capital  from  his 
father  or  saved  it  from  his  business.  But  the  history  of 
productive  cooperation  gives  us  little  encouragement  to 
expect  much  good  from  a  project  of  this  kind. 

In  speculative  investments  of  capital  it  is  quite  impossi- 
ble for  any  association,  of  laborers  or  of  any  other  men,  to 
guarantee  that  the  value  of  their  product  to  society  will 
equal  the  value  of  the  goods  consumed  by  the  laborers  in 
the  course  of  its  production.  As  business  is  carried  on 
to-day  the  losses  from  unsuccessful  investments  are  very 
frequent  indeed.  They  would  inevitably  be  even  more 
frequent  if  these  investments,  instead  of  being  made  by 
capitalists  at  their  own  risk,  were  made  by  laborers  at  the 
public  risk.      There  is  every  reason  to  believe  that  the 


382  COOP  ERA  TION. 

waste  of  public  capital  under  Lassalle's  system  would 
many  times  outweigh  any  public  gain  from  increased 
freedom  and  energy  on  the  part  of  the  laborers. 

Where  the  return  on  an  investment  is  reasonably  sure, 
it  is  quite  easy  to  find  the  money  to  set  an  enterprise  in 
motion  without  government  aid.  It  is  not  scarcity  of  capi- 
tal, so  much  as  scarcity  of  business  ability,  which  makes 
productive  cooperation  so  difficult  at  the  present  day. 
So  disinterested  an  observer  as  Schloss  regards  the  ideal 
of  a  self-governing  workshop  as  "a  curious  mixture  of 
unsound  economics  and  ill-directed  philanthropy,"  and  he 
asserts  that  the  measure  of  the  success  which  the  coopera- 
tive movement  has  attained  and  of  the  improvement 
which  it  has  effected  in  the  position  of  the  working  classes 
has  been  in  proportion  to  their  abandonment  of  the  ideals 
and  methods  of  producers'  cooperation  for  those  of  con- 
sumers* cooperation. 

§  426.  The  latter  system  has  certain  theoretical  advan- 
tages which  the  former  does  not  enjoy.  When  consumers 
are  managing  a  business  they  have  it  in  their  power  to 
avoid  many  difficulties  to  which  the  capitalist  employer  is 
subject.  Consumers  can  impose  upon  themselves  a  set  of 
rules  which  they  would  not  tolerate  if  imposed  from  out- 
side. By  obedience  to  these  rules  they  can  secure  great 
gain  in  economy  of  production,  without  diminishing  the 
utility  of  the  goods  and  services  received.  By  their  ex- 
perience in  adopting  and  enforcing  these  rules  they  can 
educate  themselves  to  a  far  higher  degree  of  economic 
forethought  than  they  would  otherwise  be  likely  to  pos- 
sess, and  can  obtain  a  decided  increase  of  comfort,  both 
for  themselves  and  for  the  community  as  a  whole. 

The  three  most  important  forms  of  consumers'  coopera- 
tion are  cooperative  purchase,  cooperative  insurance,  and 
cooperative  banking. 

§  427.  Cooperative  purchasing  agencies,  through  which 
the  buyer  gives  orders  for  what  he  wants  instead  of  wait- 


ENGLISH  COOPERATIVE   STORES.  383 

ing  for  the  seller  to  come  and  show  him  a  variety  of  goods, 
have  proved  of  the  highest  value.  This  has  been  con- 
spicuously the  case  in  country  districts,  where  buyers  are 
scattered,  stocks  of  goods  inaccessible,  and  travelling 
agents  more  or  less  irresponsible  in  their  acts  because  of 
the  absence  of  competition.  The  Patrons  of  Husbandry 
have  secured  much  advantage  for  their  members  and  for 
the  public  by  a  system  of  cooperative  purchase,  and  the 
same  thing  may  be  said  with  even  more  emphasis  of  the 
agricultural  syndicates  in  France,  Germany,  and  other  parts 
of  Europe. 

§  428.  Where  the  cooperators  have  stores  as  well  as 
purchasing  agencies — in  other  words,  where  they  aim  to 
keep  a  stock  of  goods  on  hand  to  supply  current  demands 
— any  success  which  they  may  achieve  is  more  conspicu- 
ous, but  the  danger  of  failure  is  at  the  same  time  indefi- 
nitely multiplied.  One  of  the  earliest  and  most  successful 
of  the  cooperative  stores  was  started  at  Rochdale,  in 
England,  in  1844,  by  the  modest  attempt  of  a  number  of 
workmen  to  buy  a  few  ordinary  supplies  for  their  own  use. 
The  economy  which  resulted  from  this  undertaking  was 
so  great  that  their  example  was  rapidly  followed  in  other 
English  towns.  At  the  present  day  the  cooperative 
societies  of  this  kind  in  the  United  Kingdom  have  a 
membership  of  about  a  million,  a  capital  amounting  to 
about  ten  million  pounds  sterling,  and  annual  sales  of 
three  times  that  amount. 

The  great  gain  in  economy  realized  by  the  English  co- 
operative stores  was  due  to  their  adoption  of  a  system  of 
cash  payments.  The  retail  business  of  the  United  King- 
dom had  been  burdened  with  the  practice  of  giving  long 
credits,  many  of  which  offered  no  prospect  of  collection. 
The  cost  of  this  method  of  doing  business  ultimately  fell 
on  the  solvent  consumers,  who  had  to  pay  for  the  insol- 
vent as  well  as  for  themselves.  This  credit  system  also 
interfered  with  competition,  because  many  customers  be- 


384  COOPER  A  TION. 

came  bound  to  a  particular  store  at  which  they  kept  their 
account,  and  were  not  readily  able  to  go  elsewhere.  A 
cooperative  society  avoided  all  loss  from  bad  debts  by 
insisting  on  cash  payments,  and  was  thus  able  to  give  its 
members  a  reduction  from  the  current  retail  prices  which 
covered  both  the  loss  from  bad  debts  and  the  gain  which 
the  storekeepers  had  been  accustomed  to  exact  on  the 
basis  of  their  partial  immunity  from  competition.  In  the 
United  States,  where  retail  credits  were  less  abused  than 
in  England,  and  where  competition  had  probably  been 
more  universal,  there  was  less  chance  of  economy  from 
this  source,  and  the  success  of  cooperative  stores  was 
therefore  much  less  conspicuous.  Though  the  Patrons  of 
Husbandry  have  established  large  numbers  of  successful 
purchasing  agencies,  their  losses  from  cooperative  stores 
have  been  very  serious.  Even  more  noticeable  was  the 
failure  of  an  organization  known  as  the  Sovereigns  of 
Industry,  established  in  New  England  in  1874  with  the 
avowed  purpose  of  maintaining  cooperative  stores.  Their 
purchases  were  not  judiciously  made,  and  in  a  short  time 
the  societies  were  loaded  with  unsold  goods.  They  tried  to 
economize  in  the  wrong  direction,  by  lowering  the  salaries 
of  their  managers ;  and  only  too  late  did  they  find  that 
cheap  management  wasted  much  more  than  it  saved. 

§  429.  A  cooperative  establishment  has  the  advantage 
of  avoiding  many  expenses  of  advertising  and  of  being 
sure  of  a  regular  flow  of  business.  Where  the  conditions 
of  sale  and  purchase  are  comparatively  simple,  as  in  co- 
operative creameries  and  other  enterprises  which  render 
a  restricted  range  of  services,  these  advantages  are  great 
enough  to  make  the  chance  of  success  very  considerable. 
But  for  ordinary  commercial  purposes  the  indications  are 
that  capitalistic  enterprise  does  better  than  cooperation, 
unless  there  is  some  specific  reform  in  methods  of  purchase 
or  supply,  like  the  abolition  of  the  credit  system,  which  the 
cooperators  are  prepared  to  inaugurate. 


MUTUAL  INSURANCE.  385 

§  430.  Some  of  these  reforms  are  promised  by  the  ad- 
vocates of  cooperative  insurance.  In  the  competition  of 
different  insurance  companies  with  one  another,  large 
commissions  are  paid  to  agents  for  their  services  in  secur- 
ing business.  These  commissions  represent  a  factitious 
element  in  cost,  due  to  the  strife  of  rival  companies,  and 
are  wholly  unprofitable  to  the  public,  except  so  far  as 
the  activity  of  agents  leads  people  to  make  a  fuller  use 
of  the  advantages  which  insurance  offers.  Even  this 
modicum  of  good  is  probably  neutralized  by  the  evils  of 
over-insurance  for  which  agents  are  often  accountable. 
People  are  induced  to  insure  their  lives  at  a  higher  rate 
than  they  can  properly  afford,  or  to  insure  their  houses 
for  a  larger  sum  than  the  company  can  ever  be  compelled 
to  pay.  When  the  amount  of  insurance  can  be  thus  arti- 
ficially inflated  there  is  a  temptation  to  the  agents  of  the 
company  to  accept  improper  risks  for  the  sake  of  the 
commission  involved,  and  to  the  parties  insured  to  be 
careless  with  regard  to  fires  and  other  sources  of  loss. 
It  is  claimed  that  a  cooperative  company  can  avoid 
these  dangers,  and  by  a  system  of  mutual  watchfulness 
can  lessen  risks  instead  of  increasing  them. 

§431.  The  history  of  fire  insurance  in  the  United 
States  affords  a  conspicuous  example  of  what  can  be 
done  in  this  way,  though  not  one  which  has  any  direct 
bearing  on  the  relations  between  labor  and  capital. 
About  1870  certain  factories,  which  previously  had  to  pay 
very  high  rates  of  insurance,  undertook  to  insure  one 
another  through  a  cooperative  organization  which  should 
have  in  view,  not  only  the  adjustment  of  losses,  but  the 
reduction  of  such  losses  to  a  minimum.  Its  members  vol- 
unteered to  submit  to  certain  rules  of  construction  and 
operation  which  should  render  the  liability  of  fire  as  slight 
as  possible.  Under  the  efficient  guidance  of  its  secretary, 
Mr.  Edward  Atkinson,  the  first  of  these  companies  speed- 
ily reduced  the  rate  of  insurance  for  its  members  to  a 
as 


386  COOPER  A  TION. 

small  fraction  of  what  it  had  been  under  the  old  system. 
This  saving  represented  a  gain  in  public  as  well  as  in 
private  wealth.  Anything  which  can  reduce  the  number 
of  fires  avoids  at  once  the  loss  of  property  which  the  man- 
ufacturer feels,  and  the  loss  of  comfort  which  the  work- 
man suffers  from  interruption  of  business  and  the  result- 
ing irregularity  of  employment.  Never  was  there  a  more 
signal  instance  of  the  good  possibilities  of  cooperation. 
The  old  companies  had  been  content  to  adjust  risks. 
The  manufacturers*  mutual  companies  succeeded,  not 
only  in  adjusting  them  at  far  less  cost,  but  in  reducing 
them  to  a  figure  which  a  few  years  ago  would  have  been 
thought  impossible.' 

§  432.  In  life  insurance,  the  friendly  societies  of  Eng- 
land and  fraternal  societies  of  the  United  States  have 
had  a  considerable  measure  of  success  in  reducing  expen- 
ses of  management,  and  have  been  able  to  give  their 
members  a  variety  of  forms  of  benefit  which  the  joint- 
stock  companies  could  not  have  undertaken  without 
serious  danger  of  abuse.  Whether  combined  with  trade 
societies  or  not,  they  have  afforded  many  indirect  advan- 
tages more  or  less  separate  from  the  main  purpose  of  the 
organization.  As  an  offset  to  these  benefits  we  must  note 
the  disadvantage  due  to  the  inferior  financial  responsibil- 
ity of  many  cooperative  companies.  In  the  early  years 
of  any  such  organization  the  assessments  are  apt  to  be 
made  too  low,  and  a  corresponding  burden  is  placed  on 
the  survivors  during  its  later  history — a  burden  which 
has  in  many  instances  proved  too  hard  for  the  society 
to  carry. 

§  433.  Cooperative  banking  is  perhaps  even  more  im- 

'  The  obvious  advantage  of  combining  fire  insurance  with  fire  prevention 
has  led  to  a  demand  that  municipalities,  which  take  charge  of  the  latter, 
should  also  assume  the  risks  and  profits  of  the  former.  But  this  does  not 
distribute  the  risks  over  a  sufficiently  large  area.  A  fire  like  that  of  Chicago 
a  quarter  of  a  century  ago  would  bankrupt  a  municipality  that  undertook  to 
insure  its  citizens. 


COOPERATIVE  BANKING.  387 

portant  than  cooperative  insurance.  The  essential  feature 
of  a  cooperative  bank  is  that  a  body  of  men,  many  of 
whom  expect  to  become  borrowers,  should  furnish  the 
capital  and  regulate  the  conditions  of  its  lending  and  re- 
payment. The  largest  experiment  of  this  kind  was  made 
in  Germany,  under  the  leadership  of  Schulze-Delitzsch. 
His  first  cooperative  bank  was  established  in  1849.  The 
progress  of  the  system  was  slow  until  i860,  but  much 
more  rapid  after  that  date.  In  1889  ^^^  German  coop- 
erative banking  associations  had  490,000  members,  a  cap- 
ital of  over  $30,000,000,  and  deposits  of  twelve  times  that 
amount.  The  underlying  idea  of  the  system  of  Schulze- 
Delitzsch  is  that  a  body  of  laborers  shall  enable  itself  to 
obtain  credit  by  collecting  a  small  capital  in  the  hands  of 
the  association,  shall  attract  outside  investors  by  the  offer 
of  a  fair  rate  of  interest,  and  shall  then  loan  funds  to  its 
members  after  direct  personal  examination  of  the  circum- 
stances of  the  borrower.  In  the  earlier  associations,  the 
liability  of  the  members  was  unlimiited  ;  of  late  years  this 
feature  has  been  changed.  The  educational  effect  of 
these  companies,  both  in  stimulating  workmen  to  save, 
and  in  teaching  them  the  conditions  governing  the  con- 
duct of  business,  has  been  incalculably  good.  Perhaps 
the  strongest  tribute  to  their  efficiency  is  furnished  by 
the  opposition  of  the  socialists,  who  see  in  the  success 
of  plans  like  this  the  most  insuperable  barrier  to  the 
acceptance  of  their  doctrines  among  an  intelligent  and 
powerful  section  of  German  workingmen. 

§  434.  In  England  and  the  United  States  cooperative 
banking  has  been  chiefly  confined  to  a  more  restricted 
field.  It  has  dealt  almost  exclusively  with  loans  intended 
for  building  purposes.  The  first  building  society  was  or- 
ganized in  England  in  1781  ;  the  first  legal  recognition  of 
such  societies  dates  from  1836.  There  are  now  some 
2,500  such  companies,  with  aggregate  assets  of  nearly 
sixty  million  pounds  sterling.     The  first  building  society 


388  COOP  ERA  TION. 

in  America  Wcis  organized  near  Philadelphia,  in  183 1.  In 
1890  there  were  over  5,000  such  companies  in  the  United 
States,  with  members  numbering  more  than  a  million,  not 
quite  one  third  of  whom  are  borrowers,  and  with  assets  of 
perhaps  $400,000,000.  As  these  societies  are  commonly 
organized,  the  paid-up  value  of  the  shares  is  fixed  at 
$200  each,  payable  in  instalments  of  $1  a  month.  If  no 
interest  accrued,  it  would  take  200  months  for  these 
payments  to  amount  to  the  face  value  of  the  share.  But 
as  the  subscribers  are  credited  with  the  amount  of  interest 
earned  by  their  funds,  they  pay  for  their  shares  in  about 
two  thirds  of  that  time.  The  money  thus  obtained  from 
month  to  month  is  loaned  to  shareholders,  who  agree  to  use 
it  in  building  houses  under  the  supervision  of  the  officers  of 
the  society.  The  amount  which  any  man  can  borrow  is 
limited  by  the  maturity  value  of  the  shares  for  which  he  has 
subscribed.  Thus,  the  man  who  has  subscribed  to  five  two- 
hundred  dollar  shares  may  borrow  as  much  as  $1,000,  if 
the  funds  are  on  hand  for  the  purpose.  When,  as 
generally  happens,  the  amount  in  the  treasury  is  inade- 
quate to  meet  the  wants  of  all  those  who  wish  to  borrow, 
the  loan  is  usually  awarded  to  the  man  who  will,  directly 
or  indirectly,  offer  the  highest  interest.  The  board  of 
managers  is  charged  with  the  duty  of  seeing  that  the 
money  is  invested  in  a  safe  and  secure  manner.  The 
workman  pays,  besides  interest,  his  monthly  subscription 
to  his  shares.  If  he  keeps  up  these  payments  regularly, 
he  will  in  a  few  years  find  himself  in  the  possession  of 
paid-up  shares  which  will  cancel  the  principal  of  the  debt 
when  it  becomes  due  and  leave  him  owner  of  his  house 
without  incumbrance. 

§  435.  Great  as  are  the  advantages  of  these  societies, 
they  are  of  quite  a  different  character  from  those  with 
which  they  are  popularly  credited.  They  do  not,  as  a 
rule,  enable  a  workman  to  get  a  home  cheaper  than  he 
could  obtain  it  without  them.     The  borrowers  in  these 


BUILDING  SOCIETIES.  389 

societies,  in  competing  for  loans,  are  tempted  to  offer  un- 
duly high  premiums.  The  chief  commercial  profit  of  such 
societies  goes  to  the  outside  investors,  who  do  not  intend 
to  borrow.  It  will  generally  happen  that  the  workman 
who  puts  money  in  a  savings  bank  until  he  has  a  suflficient 
amount  to  pay  part  of  the  cost  of  a  home,  and  then  bor- 
rows the  remainder  from  the  savings  bank,  with  the  view 
of  gradually  paying  the  debt  from  year  to  year,  gets  his 
house  at  less  expense  than  he  could  through  membership 
in  a  building  society.  The  cooperative  society  undoubt- 
edly stimulates  many  workmen  to  save  who  otherwise 
would  not ;  but  this  advantage  is  offset  by  the  danger 
that  in  case  of  sickness  such  compulsory  saving,  instead 
of  helping  a  man,  will  weigh  him  down  by  a  burden  too 
heavy  to  bear.  What  these  societies  do  for  the  public  is, 
first,  to  lead  workmen  to  become  holders  of  real  estate 
much  sooner  than  they  otherwise  would  do,  and  second, 
to  teach  them  the  difficulties  and  the  possibilities  atten- 
dant on  the  conduct  of  banking  business.  Both  of  these 
things  are  of  great  public  value.  The  man  who  owns  real 
estate  becomes  thereby  a  gainer  in  happiness  and  self- 
respect.  Even  if  it  involves  effort  and  self-denial,  the 
"  magic  of  property  "  lightens  the  burdens  and  sacrifices 
involved.  And  besides  the  moral  gain  to  the  real-estate 
owners  themselves,  there  is  an  equally  important  gain  to 
the  community  as  a  whole  in  having  the  ownership  of 
lands  and  houses  widely  distributed  among  its  members. 
It  puts  a  larger  number  of  citizens  on  the  side  of  law  and 
order,  in  opposition  to  the  destructive  tendencies  of 
modern  industrial  life.  It  makes  them  acquainted  with 
business  methods  and  with  the  responsibility  of  business 
control,  and  thus  lessens  the  danger  of  reckless  financial 
legislation  and  the  possibility  of  any  political  warfare  of 
classes.  It  is  in  this  educational  influence  that  building 
societies  have  their  chief  value.  When  this  is  absent,  the 
form  of  cooperative  organization  has  no  virtue.     The  so* 


390  COOPER  A  TION. 

called  national  associations,  which  simply  provide  a  means 
of  investment  and  borrowing  without  direct  personal  con- 
trol, are  always  a  source  of  danger  and  often  of  serious 
evil..  The  recent  history  of  building  societies  in  England, 
as  well  as  in  the  United  States,  has  furnished  conspicuous 
examples  of  the  abuse  of  cooperative  forms  of  enterprise, 
and  emphasizes  the  necessity  of  direct  control  by  the  co- 
operators  themselves,  as  an  essential  condition  for  secur- 
ing the  benefits  of  the  system. 

§  436.  By  far  the  most  important  form  of  consumers' 
cooperation  is  exemplified  in  government  management  of 
industrial  enterprises.  This  differs  in  two  important  par- 
ticulars from  the  cooperative  agencies  already  described. 
In  the  first  place  the  choice  of  managers  of  a  government 
business  enterprise  is  connected  with  the  general  political 
machinery  of  the  country,  and  regulated  by  constitutional 
law  instead  of  by  statutes  of  incorporation.  In  the  second 
place,  these  managers  are  likely  to  fall  back  on  the  taxing 
powers  of  the  government  to  make  up  any  deficit  which 
may  arise  in  the  operations  of  a  public  business  enter- 
prise ;  or  in  the  converse  case  to  devote  any  surplus  above 
expenses  to  the  relief  of  tax  burdens  elsewhere.  A 
government  enterprise  is  managed  by  people  who  repre- 
sent, or  are  supposed  to  represent,  the  consumers  ;  but  the 
good  or  bad  economy  of  its  management  does  not  neces- 
sarily redound  to  the  profit  or  loss  of  those  who  most 
use  it." 

It  is  impossible  within  the  limits  of  a  book  like  this  to 

'  It  is  sometime  said  that  public  business  management  is  neither  more  nor 
less  than  compulsory  cooperation.  But  it  must  be  noted  that  the  compulsion 
is  exercised  against  the  taxpayers  in  general,  rather  than  against  the  con- 
sumers of  goods  or  services  provided.  Where  is  the  compulsion  applied  in 
the  management  of  a  government  railroad?  Not  in  compelling  people  to 
use  the  road,  but  in  compelling  taxpayers  to  make  up  any  deficit  which 
arises  in  its  operations.  Of  course  the  government  may  exercise  an  indirect 
compulsion  upon  the  users  of  railroads,  if  it  prohibits  the  building  of  private 
lines,  and  thus  forces  people  to  use  its  services  or  none  at  all  ;  but  this  is 
an  accidental  rather  than  a  universal  feature  of  state  railroad  management. 


HISTORIC  FUNCTIONS  OF  GOVERNMENT.  39 1 

examine  in  detail  the  successes  or  failures  of  government 
management  of  industry  in  the  various  lines  where  it  has 
been  tried.  But  it  seems  both  possible  and  desirable  to 
group  together  the  general  causes  which  have  given  force 
to  the  demand  for  such  management  in  some  directions 
and  have  limited  its  practical  usefulness  in  others. 

§  437.  In  the  beginning  of  history,  the  government  is 
the  power  that  controls  the  army.  When  tribes  were  in  a 
state  of  warfare  with  one  another,  defense  against  foreign 
enemies  was  the  matter  of  primary  importance.  No  man 
could  let  his  private  convenience  stand  in  the  way  of 
effective  military  operations.  The  discipline  and  subordi- 
nation necessary  to  wage  successful  war  were  all-important ; 
and  all  the  powers  necessary  to  maintain  such  discipline 
were  entrusted  to  the  leaders  of  the  army. 

Somewhat  later  the  military  authorities  undertook  the 
work  of  maintaining  discipline  in  time  of  peace  as  well  as 
of  war,  and  of  defining  and  enforcing  the  rights  of  mem- 
bers of  the  tribe  against  one  another,  no  less  than  against 
foreign  enemies.  This  function  was  not  accorded  to  them 
without  a  struggle.  The  priests,  under  whose  tutelage 
the  religious  sanction  for  tribal  customs  had  grown  up, 
tried  to  keep  in  their  own  hands  the  responsibility  of  up- 
holding these  customs  and  the  physical  power  connected 
with  it.  In  some  races  they  succeeded  ;  but  among  Euro- 
pean peoples  the  military  authorities  took  the  work  of 
enforcing  and  defining  laws  out  of  the  hands  of  the  priests, 
and  made  it  a  function  of  the  state  as  distinct  from  the 
church.  As  security  from  foreign  enemies  increased,  this 
law-making  power  became  more  and  more  important. 
The  government  was  less  exclusively  identified  with  the 
army,  and  more  occupied  with  the  courts,  the  legislatures, 
and  the  internal  police.  Its  judicial  and  legislative  func- 
tions assumed  a  prominence  at  least  as  great  as  its 
military  function. 

The  growth  of  private  property  was  almost  coincident 


392  COOPER  A  TION. 

with  the  development  of  these  domestic  functions  of  gov- 
ernment. In  fact  the  two  things  reinforced  one  another. 
The  production  and  accumulation  of  capital,  to  which 
private  property  gave  so  vigorous  an  impulse,  placed  the 
strong  men  of  the  community  in  a  position  where  they 
had  less  to  gain  by  war  and  more  by  peace.  It  put  them 
on  the  side  of  internal  tranquility.  It  thus  made  the 
government  more  powerful ;  and  this  in  turn  still  further 
increased  the  accumulations  of  capital.  But  along  with 
this  mutual  help,  which  strong  domestic  government  and 
strong  property  right  rendered  one  another,  there  was  an 
element  of  mutual  antagonism.  The  very  fulfilment  of 
those  functions  which  made  the  accumulation  of  capital 
possible,  rendered  it  impossible  for  the  government  to  do 
its  work  except  at  the  expense  of  the  capitalists.  It  was 
no  longer  possible  to  support  armies  by  booty,  or  courts 
by  fines  and  forfeitures.  The  expense  of  maintaining 
order  had  to  be  paid  by  its  friends  instead  of  its  enemies. 
The  growth  of  private  property  was  followed  by  the 
development  of  a  system  of  taxation,  which,  in  theory  at 
any  rate,  involved  the  power  to  destroy  such  property'. 

The  existence  of  such  a  system  of  taxation,  with  the 
machinery  for  collecting  money  in  this  way,  allows  the 
government  more  freedom  of  industrial  action  than  any 
private  individual  can  command.  It  can  make  up  a  de- 
ficit by  compulsory  payments ;  and  this  gives  it  a  wider 
range  of  power  in  deciding  what  services  it  will  undertake 
and  what  prices  it  will  charge — a  power  which  affords 
almost  unlimited  opportunity  for  good  or  bad  use,  accord- 
ing to  the  degree  of  skill  and  integrity  with  which  it  is 
exercised. 

§  438.  Every  extension  of  government  activity  into 
new  fields  restricts  private  enterprise  in  two  ways;  first 
by  limiting  the  field  for  investment  of  private  capital,  and 
second,  by  possibly,  if  not  probably,  appropriating  through 
taxation  a  part  of  the  returns  from  private  enterprise  in 


SPHERE   OF  GOVERNMENT  ACTIVITY.  393 

all  other  fields.  The  question  whether  a  government 
should  manage  an  industry  reduces  itself  to  this:  Are  the 
deficiencies  or  evils  connected  with  private  management 
such  that  it  is  wise  to  give  government  officials  the  taxing 
power  which  constitutes  the  distinctive  feature  of  public 
industrial  management  ? 

§  439.  In  one  class  of  cases  there  is  no  doubt  whatever. 
The  expenses  for  the  army,  the  courts,  and  the  legislature, 
with  the  administrative  work  which  they  involve,  must  be 
defrayed  in  this  way.  There  may  be  a  question  how  large 
an  army  and  navy  we  should  have,  or  how  much  legisla- 
tion ;  whether  we  should  extend  legislative  activity  to 
cover  a  great  many  points  of  health  and  morals,  or  confine 
it  as  far  as  possible  to  a  few  essential  matters  of  public 
security.  But  once  having  established  an  army  or  made 
a  law,  we  have  to  pay  for  it  by  taxation.  We  have  to 
meet  the  cost  not  only  of  soldiers  and  sailors,  but  of  forts 
and  ships ;  not  only  of  congressmen  and  judges,  but  of 
policemen,  prisons,  and  other  physical  means  necessary  to 
make  their  decisions  operative.  Every  extension  of  legis- 
lative power  extends  the  scope  of  these  expenditures. 
Regulation  of  money  almost  necessarily  involves  public 
mints;  health  ordinances  involve  public  sanitation ;  com- 
pulsory education  involves  public  schools.  All  of  these 
agencies  may  be  partly  supported  by  fees  for  the  services 
rendered  ;  but  their  compulsory  character  involves  the 
necessity  of  applying  them  in  cases  where  the  collection 
of  an  adequate  fee  is  impossible. 

§  440.  This  last  point  leads  us  to  the  fundamental 
characteristic  of  a  second  class  of  circumstances  which 
justify  goverment  enterprise.  It  will  often  happen  that 
an  expenditure  of  money  promises  a  public  good  out  of 
all  proportion  to  the  amount  which  its  promoter  can  col- 
lect from  the  beneficiaries  in  case  it  proves  successful. 
Under  such  circumstances  the  government  may  take  hold 
of  an  industry,  just  because  it  cannot  be  made  to  pay  by 


394  COOPER  A  TION. 

ordinary  commercial  means.  Roads,  bridges,  canals, 
wharves,  and  lighthouses  furnish  conspicuous  instances 
of  this  sort.  It  is  an  absolute  necessity  for  the  public  to 
have  lighthouses;  but  it  is,  in  ordinary  cases,  impossible 
for  the  owner  of  a  lighthouse  to  collect  toll  for  its  main- 
tenance, either  from  the  ships  which  are  not  wrecked  or 
from  those  which  are.  It  is  of  the  utmost  importance 
for  the  community  to  have  good  roads  ;  but  the  vexation 
connected  with  the  imposition  of  tolls  for  the  use  of  the 
highway,  and  the  impossibility  of  maintaining  a  highway 
system  by  such  tolls,  force  the  government  to  take  this 
matter  into  its  own  hands. 

Irrigation  works  in  desert  lands  are  likely  to  furnish 
another  important  example  of  this  kind ;  especially  if  it 
be  true  that  the  storage  and  distribution  of  water  pro- 
duces a  rainfall  in  districts  previously  arid,  so  that  those 
who  pay  nothing  for  the  works  can  nevertheless  get  a 
share  in  these  benefits.  An  instance  of  a  little  different 
character,  but  which  comes  under  the  same  general  head, 
is  furnished  by  forestry.  The  public  need  of  forests  for 
the  sake  of  securing  a  regular  rainfall  is  one  in  which  the 
whole  community  has  an  interest,  but  which  is  not  a 
matter  of  personal  profit  to  any  one.  Each  man  will, 
therefore,  often  destroy  his  own  forests  for  the  sake  of 
the  lumber,  and  trust  to  others  to  leave  theirs  for  the 
sake  of  the  rainfall.  In  a  case  like  this,  government 
interference  has  been  abundantly  justified. 

§  441.  In  supplying  these  needs,  the  government  serves 
a  public  necessity.  But  there  are  two  opposite  causes 
which  often  prevent  it  from  doing  its  work  judiciously. 
Either  the  taxpayers  know  that  they  are  paying  for  these 
improvements,  or  they  do  not.  If  they  know  it,  as  in  the 
case  of  country  roads,  they  will  grudge  every  penny  of 
necessary  expense,  and  will  waste  in  horseflesh  and 
wagon-wheels  many  times  the  amount  of  capital  which 
would  have  sufificed  to  put  the  road  system  in  proper 


MISTAKES  IN  PUBLIC  EXPENDITURE.  395 

shape.  Seeing  no  pecuniary  return  for  the  money  which 
they  spend,  they  will  cause  themselves  great  pecuniary 
loss  by  their  shortsighted  economy.  If,  on  the  other 
hand,  the  taxpayers  do  jiot  see  whose  money  is  being 
spent,  as  in  the  case  of  ship  canals  and  other  works  of 
national  importance,  they  will  look  only  at  the  question 
of  convenience,  and  will  fail  to  see  that  somebody  must 
pay  for  this  convenience  by  taxation.  They  will  commit 
the  fallacy  of  confounding  government  property  with 
public  wealth,  and  will  ignore  the  fact  that  unwise  ex- 
penditures on  government  property  lessen  the  public 
wealth  instead  of  increasing  it. 

The  danger  of  this  mistake  is  intensified  by  the  fact  that 
so  many  people  believe  the  expenditure  of  money  to  be 
in  itself  a  positive  benefit,  without  considering  the  source 
whence  it  is  drawn  ;  and  are  ready  to  make  appropria- 
tions for  objects  of  slight  value,  because  they  can  see  the 
money  which  is  spent  and  cannot  see  the  losses  involved 
in  collecting  it,'  The  history  of  river  and  harbor  improve- 
ments has  often  been  a  public  scandal.  Some  of  them 
are  recklessly  made,  without  the  remotest  prospect  of 
permanent  benefit  to  any  one.  Others,  which  promise  a 
benefit,  are  begun  without  anything  like  a  careful  esti- 
mate of  the  probable  cost.  Many  an  advocate  of  canal 
projects  claims  that  a  canal  is  a  cheaper  means  of  trans- 
portation than  a  railroad  ;  basing  his  argument  on  figures 
which  include  interest  and  maintenance  in  the  expense  of 
railroad  transportation  and  exclude  interest  and  main- 
tenance from  the  cost  of  canal  transportation.  The  com- 
parison is  made  in  this  fashion  because  the  government 
habitually  pays  interest  and  maintenance  on  the  canal, 

'  This  danger  is  by  no  means  confined  to  expenditures  for  industrial  enter- 
prises. It  is  exemplified  in  the  demand  for  pensions  of  various  forms 
(compare  §  75).  In  the  United  States  there  is  a  strong  pressure  toward 
regarding  military  and  naval  pensions  not  as  a  means  of  support  to  those 
disabled  in  the  service  of  the  government,  but  as  a  means  of  distributing 
public  money  as  widely  as  possible  among  private  individuals. 


396  •         COOPER  A  TION. 

SO  that  this  is  supposed  to  be  no  part  of  the  expense  of 
the  shipment.  But  it  represents  a  cost  to  the  public  just 
as  much  as  if  it  were  paid  by  private  individuals,  and 
any  legislation  which  ignores  this  element  of  cost  is 
blindly  increasing  public  burdens. 

§  442.  A  third  class  of  cases  brings  us  into  much  more 
doubtful  ground.  There  are  many  enterprises  whose  con- 
trol by  private  individuals  or  corporations  seems  to  give 
those  individuals  or  corporations  an  arbitrary  power  over 
the  industrial  interests  of  the  country  ;  which  forms  a 
menace  to  public  wealth,  and  destroys  whatever  presump- 
tion  may  exist  in  favor  of  private  control  of  industry. 

Let  us  see  what  constitutes  the  real  basis  of  this 
presumption. 

Each  consumer  probably  knows  better  than  any  one 
else  whether  he  wants  an  article  enough  to  pay  a  specified 
price  for  it.  Each  producer  presumably  knows  better 
than  any  one  else  whether  he  can  do  a  thing  cheaply 
enough  to  meet  the  consumer's  wants.  Competition 
allows  any  man  to  get  an  article  if  he  is  willing  to  pay  the 
the  market  price  for  it,  and  offers  inducements  to  any  man 
to  make  an  article  if  he  can  do  it  for  less  than  the  market 
price.  In  so  doing,  it  at  once  puts  goods  where  they 
are  wanted,  makes  every  producer  do  his  best  work,  and 
stimulates  progress  by  giving  every  incentive  for  new 
methods.  Even  if  many  mistakes  are  made  in  trying 
these  new  methods,  the  gain  to  the  community  from 
the  permanent  application  of  those  that  succeed  out- 
weighs the  loss  from  the  immediate  cost  of  those  that 
fail.  Finally,  the  rivalry  of  different  producers  causes 
them  to  sell  their  products  at  low  rates,  and  gives  the 
benefit  of  new  methods  to  the  consumers  as  a  body 
instead  of  allowing  it  to  be  appropriated  by  a  few 
capitalists. 

But  it  is  obvious  that  these  advantages  are  largely,  if 
not  wholly,  dependent  upon  the  existence  of  free  compe- 


PUBLIC  OWNERSHIP   OF  MONOPOLIES.  2)97 

tition.'  In  the  case  of  a  monopolized  industry,  the  chance 
for  experiments  is  less  wide,  the  stimulus  to  producers' 
energies  less  effective.  Instead  of  putting  prices  so  low 
as  to  bring  the  product  within  reach  of  every  consumer 
who  can  pay  the  cost,  a  monopoly  may  use  its  power  to 
fix  unfairly  high  rates,  thus  increasing  its  own  profits  but 
lessening  the  sphere  of  its  public  service.  This  danger  is 
present  to  a  noticeable  degree  in  the  case  of  waterworks, 
of  lighting,  whether  by  gas  or  electricity,  and  in  many  of 
the  industries  occupied  with  the  conveyance  either  of 
intelligence,  of  passengers,  or  of  general  traffic.  It  is  hard 
to  avoid  these  dangers  by  legislative  control  of  rates, 
owing  to  the  inherent  difficulty  of  allowing  anybody  to 
fix  the  charges  for  a  service  except  those  who  risk  their 
own  capital  in  so  doing.  If  the  government  allows  cor- 
porations to  make  unduly  high  charges,  it  subjects  the 
public  to  the  danger  of  extortion.  If  it  insists  on  their 
making  charges  which  turn  out  to  be  unfairly  low,  it  de- 
prives the  investors  of  the  control  and  enjoyment  of  their 
property.  Why  should  it  not  meet  the  difficulty  directly, 
by  owning  and  managing  these  enterprises,  and  making 
changes  in  rates  with  a  free  hand,  at  its  own  risk  ? 

The  answer  to  this  question  will  depend  partly  on  the 
industry  involved,  and  partly  on  the  financial  ability  of 
the  government  which  seeks  to  take  control. 

§  443.  The  criteria  laid  down  by  Jevons"  to  determine 
when  an  industry  can  advantageously  be  managed  by  the 
government,  are  as  follows  : 

I.  Where  numberless  widespread  operations  can  only 
be  evenly  connected,  united,  and  coordinated  in  a  single 
all-extensive  government  system. 

'  H.  C.  Adams  says  that  the  presumption  in  favor  of  private  control  is 
lessened  if  not  destroyed  where  the  "law  of  increasing  return  "  holds  good. 
But  we  have  seen  (§  168,  note)  the  danger  involved  in  making  too  much  of 
this  distinction. 

'  "  Methods  of  Social  Reform,"  p.  279. 


398  COOPERA  TION. 

2.  Where  the  operations  possess  an  invariable  routine- 
like character, 

3.  Where  they  are  performed  under  the  public  eye,  or 
for  the  service  of  individuals  who  will  immediately  detect 
and  expose  any  failure  or  laxity. 

4.  Where  there  is  but  little  capital  expenditure,  so  that 
each  year's  revenue  and  expense  account  shall  represent, 
with  sufficient  accuracy,  the  real  commercial  conditions 
of  the  development. 

All  this  is  good  as  far  as  it  goes ;  but  it  leaves  the  heart 
of  the  difficulty  untouched.  Passing  over  the  first  of 
these  points,  which  really  begs  the  whole  question,  we 
have  before  us,  not  an  indication  of  the  conditions  under 
which  a  government  can  manage  an  industry  with  the 
best  advantage,  but  of  those  under  which  its  management 
is  attended  with  the  least  danger.  Jevons's  principles  are 
restrictive  and  not  positive.  They  show  how  far  you  can 
trust  the  government  without  serious  danger  of  financial 
mismanagement.  Assuming  the  existence  of  a  political 
or  fiscal  motive  for  extending  the  sphere  of  official  action, 
these  criteria  show  in  which  direction  such  an  extension 
can  be  made  with  the  least  probability  of  loss  and  corrup- 
tion.' Judged  on  this  basis,  waterworks  form  an  excel- 
lent field  for  municipal  activity,  gas  works  a  more  doubt- 
ful one,  and  electricity  in  its  various  applications  quite  an 
unsuitable  one.  For  the  national  government,  these  con- 
ditions indicate  that  the  post-office  is  suitable  as  a  field 
of  employment,  the  telegraph  a  little  more  doubtful,  and 
the  railroad  much  more  conspicuously  so.  Unfortunately, 
these  criteria  as  a  rule  apply  best  where  the  initial  neces- 
sity for  government  ownership  is  least.  They  indicate 
that  the  government  may  properly  own  industries  where 

'  Even  on  this  restricted  basis,  a  fifth  criterion  should  be  added  to  those 
of  Jevons  :  namely,  that  the  public  management  has  special  advantages 
where  the  government  is  itself  a  large  consumer,  as  in  the  case  of  municipal 
water  supply,  so  that  questions  of  price  wiU  be  looked  at  by  the  financial 
authorities  from  two  points  of  view. 


i 

^ 


A    CHOICE   OF  EVILS.  399 

it  could  easily  enough  regulate  a  private  company,  and 
may  not  so  properly  control  industries  where  it  is  difficult 
to  regulate  a  private  company.  With  regard  to  the  rela- 
tive merits  of  the  two  systems,  administrative  ownership 
or  legislative  control,  in  a  really  perplexing  case  like  rail- 
roads, Jevons's  principles  furnish  us  no  help.  Just  where 
the  difficulties  attendant  upon  private  ownership  are  great- 
est, these  tests  shut  the  door  most  hopelessly  against 
state  purchase,  and  leave  us  no  alternative  whatsoever. 

§  444.  In  an  industry  like  the  railroad,  both  private 
ownership  and  state  ownership,  even  under  the  best  of 
circumstances,  are  likely  to  be  attended  with  a  great  deal 
of  dissatisfaction.  Neither  system  is  free  from  serious 
abuses.  The  choice  between  the  two  is  in  some  measure 
a  choice  of  evils.  Under  private  ownership  we  have 
rapid  development  of  effective  methods  and  processes, 
and  a  high  degree  of  industrial  efficiency ;  but  side  by 
side  with  this  we  have  great  discriminations  and  fluctua- 
tions in  rates,  which  no  system  of  legislation  seems  able 
to  keep  within  bounds.  If  the  government  owns  all  the 
railroads  of  a  country  it  will  meet  many  of  these  difficul- 
ties about  rates.  It  will  make  them  steady,  and  as  a  rule 
low.  To  offset  these  advantages,  it  will  give  a  service 
which,  to  a  country  accustomed  to  the  freer  system 
of  private  management,  will  seem  seriously  defective. 
Germany  furnishes  a  most  conspicuous  example  of  a  well 
managed  state  railroad  system.  The  rates  of  the  German 
railroads  are  on  the  whole  quite  satisfactory.  But  the 
amount  of  train  service  in  proportion  to  the  population, 
and  the  quickness  of  the  trains  themselves,  whether  for 
passengers  or  freight,  are,  according  to  English  and 
American  standards,  miserably  inadequate. 

§  445.  On  the  whole,  private  ownership  of  monopolies 
tends  to  rapid  development  and  utilization  of  improve- 
ments. With  all  the  talent  that  has  been  put  into  the 
public  administration  of  industry  it  is  a  salient  fact  that 


400  COOPER  A  TION. 

the  important  inventions  have  been  made  in  countries 
enjoying  private  enterprise.  The  telegraph,  the  tele- 
phone, the  electric  light,  the  railroad  track,  the  locomo- 
tive, the  air  brake,  the  block-signal  system,  were  all 
introduced  by  private  companies.  In  most  cases  it  took 
government  experts  from  ten  to  twenty-five  years  to  dis- 
cover them  after  they  had  been  in  successful  use  on  pri- 
vate lines.  We  also  find  that  the  efficiency  and  quantity 
of  service  is  generally  higher  than  we  see  it  under  govern- 
ment management.  In  spite  of  the  ability  of  the  Prussian 
civil  service  the  fact  remains  conspicuous  that  England 
and  America  have  more  trains  in  proportion  to  the  popula- 
tion than  Prussia,  and  that  they  run  them  faster.' 

§446.  With  regard  to  the  relative  effect  of  state  and 
private  ownership  in  making  prices  high  or  low,  no  general 
propositions-  can  be  maintained.  The  United  States  and 
England  are  the  two  most  conspicuous  examples  of 
countries  that  have  private  railroads.  The  United  States 
has  the  lowest  freight  rates  of  any  important  commercial 
country  in  the  world.  England  has  the  highest.  In 
either  case,  if  we  go  below  the  surface,  we  find  reasons 
for  the  conditions  that  prevail.  The  long  hauls  of  cheap 
freight  give  the  American  railroads  an  opportunity  to 
reduce  rates,  of  which  they  have  been  quick  to  avail  them- 
selves. In  England  just  the  opposite  conditions  prevail, 
and  the  opposite  results  naturally  follow.  On  the  other 
hand,  the  high  American  passenger  rates  are  fully  ex- 
plained by  the  small  density  of  population  and  the  high 
average  earning  power,  which  make  it  worth  while  for 
passengers  to  pay  high  rates  in  order  to  have  trains  run 
when  they  want  them.  The  same  kind  of  explanation 
accounts  for  most  of  the  glaring  differences  in  charge  for 

'  If  the  government  protects  private  companies  from  competition  these 
advantages  of  private  enterprise  do  not  make  themselves  felt.  The  French 
railroads,  which  enjoy  a  guaranteed  monopoly,  stand  in  about  the  same  con- 
dition as  the  state-owned  roads  of  Germany,  with  regard  both  to  train  service 
and  train  speeds,  besides  charging  rather  higher  rates. 


TfVO   OPPOSITE   DANGERS.  4OI 

telegraph  service,  lighting,  and  other  objects  of  industrial 
monopoly,  which  are  adduced  by  extreme  partisans  either 
of  state  or  of  private  ownership  as  arguments  for  their 
respective  views. 

§  447.  Both  the  advantages  and  the  dangers  of  govern- 
ment management  of  industry  depend  largely  upon  the 
form  of  the  government  itself ;  while  the  possibility  of 
securing  the  one  and  avoiding  the  other  is  largely  depen- 
dent upon  the  character  of  public  men  and  methods. 

In  a  country  like  Prussia,  where  the  military  element 
of  the  government  remains  the  dominant  one,  we  may  ex- 
pect to  find  public  enterprises  managed  with  strict  disci- 
pline, good  economy — at  any  rate  in  the  narrower  sense  of 
the  word, — and  freedom  from  glaring  abuses.  The  chief 
errors  of  such  a  government  come  from  not  responding 
quickly  to  the  needs  of  industrial  progress.  It  is  apt  to 
be  slow  in  utilizing  improvements  or  making  changes  of 
method  :  while  there  is  always  a  danger,  which  only  the 
best  governments  are  able  to  avoid,  that  the  monopoly 
will  be  used  to  tax  the  public  instead  of  to  help  it. 

In  a  government  where  the  legislative  element  is  more 
prominent,  and  especially  in  a  democratic  one,  the  case 
is  reversed.  Such  a  government  prides  itself  on  respond- 
ing to  popular  needs.  Its  legislators  are  chosen  to  give 
expression  to  the  public  will,  and  too  often  pride  them- 
selves on  their  subserviency  to  the  people.  Under  such 
conditions  we  are  likely  to  have  reductions  in  rates  to  the 
lowest  limit  which  a  regard  for  the  budget  will  allow,  and 
activity  in  making  obvious  improvements  and  popular 
changes  of  method.  On  the  other  hand  we  are  in  the 
gravest  danger  of  sacrificing  discipline  and  economy,  and 
of  making  subserviency  to  the  popular  will  a  cloak  to 
cover  abuses  of  trust  and  violations  of  commercial 
honesty. 

§  448.  The  chance  of  securing  the  advantages  and 
avoiding, the  evils  of  either  form  of  government  is  better 


402  COOPERA  TION. 

in  a  municipality  than  in  a  nation.  For  the  municipahty 
is  neither  a  military  body  nor  in  its  main  functions  a  legis- 
lative body,  but  an  administrative  one  ;  and  while  the 
character  of  the  administration  chosen  is  likely  to  reflect 
in  some  measure  the  traditions  of  the  central  government, 
there  is  no  necessary  connection  between  the  two.  More- 
over, the  responsibility  for  the  success  or  failure  of  munici- 
pal administration  is  less  hopelessly  obscure  than  is  apt 
to  be  the  case  with  national  administration.  This  being 
the  case,  the  chance  for  successful  and  economical  control 
of  enterprises  by  municipalities  is  better  than  the  chance 
under  national  authorities. 

§  449.  If  any  government  agency,  local  or  national,  is 
to  be  entrusted  with  the  management  of  an  industrial 
enterprise,  a  non-partisan  civil  service  is  absolutely  essen- 
tial for  success.  Even  in  so  simple  a  case  as  the  post 
office,  the  abuses  of  patronage  have  been  great,  and  only 
the  enforced  monopoly  of  the  government  which  shuts 
out  private  competition  in  letter  carriage  prevents  us 
from  seeing  how  great  is  the  waste  which  arises  from  this 
source.  Much  more  must  this  danger  make  itself  felt  in 
industries  with  large  capital  accounts.  Only  where  the 
traditions  of  the  civil  service  are  such  that  the  best  men  of 
the  country  seek  and  gain  admission  to  it,  independent 
of  party,  can  we  hope  that  the  advantages  from  govern- 
ment management  of  these  industries  might  outweigh  the 
evils.  With  the  conditions  as  they  exist  in  the  United 
States,  political  reasons  compel  us  to  reduce  government 
ownership  of  fixed  capital  to  a  minimum.  Any  exten- 
sion of  party  patronage  to  a  new,  lucrative,  and  complex 
field  must  involve  serious  dangers  to  the  already  inade- 
quate powers  of  our  Civil  Service  Commission.  The 
Italian  authorities  fifteen  years  ago,  after  the  fullest  in- 
vestigation, came  to  a  decision  adverse  to  government 
management  of  railroads  ;  and  this  decision  was  based 
largely  on  the  ground  that  politics  would  corrupt  the 


INDUSTRY  AND  POLITICS.  403 

railroad  management  and  the  railroad  management  would 
corrupt  politics.  So  long  as  an  administration  is  to  any 
considerable  degree  swayed  by  partisan  considerations 
instead  of  industrial  ones,  every  extension  of  government 
activity  to  new  fields  must  be  regarded  with  grave  appre- 
hension. 


CHAPTER  XIII. 

PROTECTIVE   LEGISLATION. 

The  Eight-Hour  Movement — The  Contract  System — Prison  Labor — Foreign 
Immigration — Protective  Tariffs — The  Popular  Argument — The  De- 
velopment of  Infant  Industries — Political  and  Military  Questions 
Involved. 

John  Rae  :  "Eight  Hours  for  Work."     I^ondon,  1894. 

R.  Mayo-Smith  :  "  Emigration  and  Immigration  :  a  Study  in  Social 
Science."     New  York,  1890. 

Leone  Levi :  "  The  History  of  Commerce  and  of  the  Economic  Progress 
of  the  British  Nation,  1763-1878."     London,  1880. 

F.  W.  Taussig:  "The  Tariff  History  of  the  United  States."  2d  ed. 
New  York,  1892. 

No  student  of  the  theory  of  protection  should  fail  to  read  the  fourth  book 
of  Smith's  Wealth  of  Nations,  The  more  recent  controversial  literature  on 
the  subject  is  almost  as  disappointing  as  that  on  bimetallism 

§  450.  It  is  a  natural  consequence  of  the  popular  doc- 
trine of  wages  (§  344)  that  its  adherents  try  to  make 
use  of  legislative  authority  to  diminish  the  apparent  over- 
supply  of  labor  ;  sometimes  by  forced  reductions  of  hours, 
sometimes  by  prohibiting  the  employment  of  certain 
classes  of  laborers,  sometimes  by  restricting  the  importa- 
tion of  foreign  products  with  a  view  to  the  creation  of  new 
fields  for  home  industry.  They  see  that  the  different 
workmen  in  an  industrial  community  compete  with  one 
another ;  they  fail  to  see  that  they  consume  one  another's 
products.  In  consequence  of  this  one-sided  view,  they 
favor  almost  any  policy  that  reduces  the  intensity  of  com- 
petition among  workmen  as  producers,  even  though  it 

404 


t 


REDUCTION  OF  HOURS.  405 

may  ultimately  reduce  the  amount  of  wealth  that  can  be 
divided  among  the  workmen  as  consumers. 

As  a  result  of  this  fallacy,  even  the  most  wholesome 
measures  are  defended  on  false  grounds.  There  is  a  dis- 
position to  find  the  reason  for  prohibiting  child  labor, 
not  in  its  real  effect  on  the  health  and  morals  of  the  com- 
munity, but  in  its  supposed  effect  in  diminishing  the 
employment  of  adults ;  to  seek  grounds  for  the  restric- 
tion of  foreign  immigration,  not  in  the  political  dangers 
attendant  upon  it,  but  in  its  industrial  consequences  in 
taking  away  the  bread  from  home  labor ;  to  argue  for 
shorter  hours  of  labor,  not  as  a  means  of  improving  the 
quality  of  the  operatives,  but  as  a  means  of  giving  work 
to  a  larger  number  of  hands. 

§  451.  The  advocates  of  the  eight-hour  movement  gen- 
erally hold  that  a  restriction  on  the  quantity  produced 
by  each  individual  laborer  places  the  laborers  as  a  class 
in  a  better  position  to  bargain  with  those  who  desire  to 
employ  them.  They  believe,  or  at  least  imply,  that  a 
diminution  in  the  supply  of  labor  by  legislative  enact- 
ment tends  to  increase  the  competition  of  capitalists  for 
the  laborers*  services.  They  claim  that  enforced  reduc- 
tion of  hours  of  work  would  create  (i)  a  demand  for  the 
labor  of  men  who  are  now  unemployed,  and  (2)  an  in- 
crease in  the  price  of  work  per  hour,  which  would  enable 
those  who  were  previously  working  ten  hours  to  get  the 
old  rate  of  wages  for  eight  hours'  work  instead  of  ten. 

§  452.  This  course  of  events  is  most  improbable.  The 
proportion  of  the  unemployed  is  not  likely  to  be  dimin- 
ished by  a  forced  reduction  in  the  hours  of  labor.  Among 
the  many  causes  of  "  unemployment,"  the  two  most  im- 
portant are  the  shiftlessness  of  individual  laborers  and 
the  fluctuations  of  commercial  credit.  The  first  of  these 
causes  would  not  be  affected  by  legislative  reduction  of 
the  hours  of  labor  ;  the  second  would,  for  the  moment  at 
any  rate,  be  adversely  affected.     The  experience  of  France 


406  PROTECTIVE  LEGISLATION. 

after  the  revolution  of  1848,  indicates  that  a  sudden 
change  in  conditions  of  employment,  devised  in  the  in- 
terest of  the  laboring  classes,  may  so  far  paralyze  credit 
as  to  increase  the  proportion  of  the  idle  rather  than  to 
diminish  it. 

If  the  number  of  the  unemployed  remains  approximately 
the  same  and  the  product  of  the  employed  diminishes  as 
a  result  of  the  reduction  of  time,  a  loss  in  real  wages  is 
apparently  inevitable.  The  margin  of  profit  in  modern 
industry  is  so  narrow  that  any  considerable  gain  made  by 
the  laborers  at  the  expense  of  the  capitalists  so  far  di- 
minishes the  investment  of  capital  in  the  immediate 
future  as  to  hurt  the  laboring  classes  in  the  long  run 
more  than  it  helps  them  for  the  moment.  This  would 
be  the  obvious  effect  if  one  nation  adopted  the  system 
and  its  competitors  did  not.  For  this  reason,  many 
advocates  of  the  eight-hour  movement  are  disposed  to 
insist  that  it  should  be  made  an  international  measure, 
and  that  if  any  nation  should  refuse  to  take  part  in  apply- 
ing it,  other  nations  should  defend  themselves  against  the 
recalcitrant  by  imposing  discriminating  duties  upon  its 
products. 

This  removal  of  international  competition  puts  the  dif- 
ficulties of  the  eight-hour  movement  a  little  way  out  of 
sight ;  it  does  not  by  any  means  meet  them.  No  inter- 
national arrangements  or  protective  tariffs  will  make  one 
loaf  of  bread  serve  the  purpose  of  two.  An  eight-hour 
law  either  applies  to  agriculture,  or  it  does  not.  If  it 
applies  to  agriculture,  it  will  make  food  products  scarce. 
Any  one  who  is  inclined  to  doubt  this  will  soon  be  con- 
vinced of  its  truth  if  he  watches  the  actual  operations  of 
farm  life.'  If  food  products  are  scarce,  some  people  will 
surely  starve.  If,  on  the  other  hand,  the  eight-hour  law 
does  not  apply  to  agriculture,  the  city  laborers  who  have 

'  If  an  eight-hour  day  for  farm  work  was  once  the  rule  in  England,  as 
Rogers  thinks,  it  must  have  been  accompanied  by  a  great  deal  of  overtime. 


# 

EFFECT  ON  OUTPUT,  407 

hoped  to  maintain  a  high  price  for  manufactured  pro- 
ducts, or  to  give  work  to  the  unemployed  by  a  restriction 
in  the  output  per  capita,  will  find  themselves  wofully 
deceived.  For  if  the  attractions  which  now  draw  men 
from  the  country  to  the  city  are  supplemented  by  a 
shortening  of  hours  of  labor  which  applies  to  the  latter 
and  not  to  the  former,  we  shall  have  more  laborers  com- 
peting for  the  city  work,  and  more  supplies  of  manufac- 
tures to  exchange  for  food.  We  shall  see  a  larger  number 
of  laborers  working  at  starvation  rates  which  the  strong 
man  is  not  allowed  to  better  by  working  overtime.  He 
must  see  his  children  die  because  the  law  prohibits  him 
from  earning  the  food  they  need.  If  this  is  to  be  the 
result  of  the  eight-hour  movement  it  may  well  be  termed 
suicidal. 

§  453.  The  really  strong  arguments  for  reduction  of  the 
hours  of  labor  are  advanced  by  those  who  do  not  believe 
that  the  product  of  labor  will  be  greatly  diminished  by 
such  a  policy.  There  is  much  that  they  can  urge  in  sup- 
port of  this  view.  They  can  show  that  in  times  past  the 
gradual  reduction  of  the  working  day,  from  twelve  and 
thirteen  hours  to  ten  or  nine,  has  not  caused  the  ex- 
pected diminution  of  output.  A  shortening  of  the  dura- 
tion of  labor  has  been  accompanied  by  increased  speed, 
which  very  soon  brings  the  per  capita  production  up  to 
the  old  level. 

Shortened  hours  combined  with  increased  speed  make 
the  conditions  of  employment  more  favorable  for  high 
grade  labor  and  less  favorable  for  low  grade  labor.  The 
better  laborer  does  not  dislike  the  speed  and  enjoys  the 
time  saved.  Where  one  country  or  state  has  reduced  the 
hours  of  labor,  while  another  has  retained  the  longer 
working  day,  there  has  been  a  noticeable  differentiation 
of  the  character  of  the  employment  in  the  two  localities. 
There  was  a  time  when,  as  a  result  of  legislative  enact- 
ment, Massachusetts. mills  were  running  ten  hours  a -day, 


408  PROTECTIVE  LEGISLATION. 

while  Connecticut  mills  were  running  eleven  hours.  This 
did  not  mean  that  mill  hands  in  Connecticut  earned  higher 
wages  than  those  in  Massachusetts,  or  made  more  pro- 
ducts ;  nor  did  it  mean  that  Connecticut  mill  owners 
earned  larger  dividends.  The  Massachusetts  mills  ran  at 
greater  speed,  employed  a  higher  character  of  operatives, 
produced  on  the  whole  a  higher  grade  of  goods,  and 
earned  a  fair  rate  of  profit  in  so  doing.  The  Connecticut 
mills  ran  at  lower  rates  of  speed,  and  employed  operatives 
of  somewhat  lower  grade  than  those  of  Massachusetts,  at 
no  higher  rates  of  wages  to  the  laborer  or  profits  to  the 
employer. 

It  may  fairly  be  asked  why  the  reduction  of  hours,  if  it 
involves  no  loss  of  profit,  may  not  be  left  to  the  voluntary 
action  of  the  employer.  The  answer  is  this:  Industrial 
history  has  proved  that  employers  are  not,  as  a  rule,  ready 
to  take  the  initiative  in  these  reductions.  The  unen- 
lightened members  of  the  employing  class  are  often  able 
to  dictate  the  policy  of  the  whole  body  in  this  matter.  If 
the  employees  were  united  in  a  universal  strike  in  the 
whole  trade,  for  the  sake  of  reduction  of  hours,  they  could 
force  a  compliance  with  their  demands  ;  but  such  a  result 
could  only  be  accomplished  at  great  sacrifice  to  the  com- 
munity as  a  whole,  and  in  many  trades  a  minority  of  un- 
intelligent employees  could  defeat  the  change  altogether. 
Under  these  circumstances,  recourse  must  sometimes  be 
had  to  legislative  enactments. 

§  454.  For  success  in  legislation  of  this  kind  it  is 
necessary  that  the  prescribed  reductions  be  moderate  in 
amount,  keeping  well  within  the  limits  of  what  the  public 
sentiment  of  the  community  will  sustain.  Otherwise,  any 
statute  becomes  a  dead  letter.  The  eight-hour  law  of  the 
United  States  is  a  monumental  instance  of  failure.  To  be 
successfully  applied,  a  law  reducing  hours  of  labor  must 
be  strictly  mandatory  and  not  permissive  or  optional. 
The  conditions  under  which  overtime  is  to  be  allowed 


TRADE    OPTION.  4O9 

must  be  accurately  defined  ;  and  the  provisions  of  the  law 
on  this  subject  must  be  enforced,  even  in  cases  where  its 
enforcement  involves  hardship.  It  is  fatal  to  the  success 
of  an  act  if  public  sentiment  justifies  individuals  in  taking 
the  matter  of  exceptions  into  their  own  hands.  The 
Fabian  Society  of  England,  in  its  advocacy  of  the  eight- 
hour  day,  seems  inclined  to  be  satisfied  with  a  law  based 
on  the  principle  of  trade  option.  Such  a  law  would  pro- 
vide that  where  it  is  proved  to  the  satisfaction  of  a  Secre- 
tary of  State  that  the  majority  of  persons  employed  in 
any  one  trade  favors  a  statutory  reduction  in  the  hours  of 
labor,  this  may  be  made  the  basis  of  an  order  for  such 
reduction.  There  seems  no  great  reason  to  apprehend 
much  evil  from  the  adoption  of  a  policy  of  this  kind,  in  a 
country  where  workmen  are  at  once  so  well  organized  and 
so  well  educated  as  in  England.  The  danger  that  a  good 
workman  will  voluntarily  cajiise  a  reduction  in  his  earn- 
ings for  the  sake  of  shortening  his  working  hours  is  not 
very  serious.  But  it  must  constantly  be  borne  in  mind 
that  reductions  of  hours,  even  more  conspicuously  perhaps 
than  other  forms  of  labor  legislation,  bear  heaviest,  not 
on  the  employer,  not  on  the  man  who  has  money  to 
spend,  but  on  the  labor  of  those  who  cannot  stand  the 
increased  speed  and  are  therefore  forced  to  a  choice 
between  a  lower  standard  of  comfort  or  an  intensity  of 
strain  which  they  cannot  bear. 

§455.  The  argument  for  restricting  the  employment  of 
certain  classes  of  labor  is  obviously  far  stronger  than  that 
for  general  restrictions  on  the  labor  supply  as  a  whole.  Pro- 
hibition of  child  labor  is  unquestionably  justified  on  public 
grounds,  because,  if  the  children  go  to  work  in  the  factory 
at  too  early  an  age  they  are  deprived  of  the  chance  of  health 
and  education  which  would  enable  them  to  make  the  most 
of  themselves.  The  community  is  not  always  better  of? 
for  the  moment,  from  keeping  them  out  of  the  mills  ;  but 
it  is  far  better  off  in  the  long  run  from  having  strong  citi- 


4IO  PROTECTIVE  LEGISLATION. 

zens  instead  of  weak  ones.  The  gain  to  the  laborers  from 
such  a  policy  is  to  be  sought  not  in  the  momentary  reduc- 
tion of  the  labor  supply,  but  in  the  ultimate  increase 
of  that  supply  as  the  children  grow  to  a  more  eflficient 
manhood. 

§  45,6.  It  is  very  hard  to  tell  at  what  age  the  prohibition 
of  child  labor  should  cease.  If  a  boy  of  thirteen  or  four- 
teen is  strong  enough  to  earn  his  living,  his  gain  from  the 
food  and  other  comforts  which  he  earns,  is  probably 
greater  than  his  loss  from  confinement  at  his  labor.  In 
cases  like  this,  the  harm  from  keeping  him  out  of  work 
is  likely  to  outweigh  the  good.  The  same  difficulty  in 
even  more  perplexing  shape  is  involved  in  the  regulation 
of  women's  labor.  There  are  many  women  who  work  for 
lower  wages  than  those  which  men  in  corresponding  em- 
ployments are  willing  to  accept.  Some  of  them  live  in 
homes  where  they  are  supported  by  their  parents,  and 
where  any  income  which  they  may  earn  represents  an 
addition  to  the  family  income.  Others  have  families 
dependent  upon  them  and  are  ready  to  kill  themselves 
rather  than  see  their  children  starve.  Each  of  these 
classes  contributes  to  the  increase  of  the  labor  supply  in 
certain  lines,  and  allows  wages  in  those  lines  to  fall  below 
the  figure  necessary  to  keep  the  laborer  alive.  Men  will 
not,  as  a  rule,  take  these  low  wages.  They  are  not 
allowed  to  remain  in  dependence  on  their  parents ;  they 
will  not  go  as  far  as  women  in  killing  themselves  for  the 
sake  of  their  children.  They  have  a  standard  of  wages 
which  they  insist  on  receiving ;  in  default  of  such  wages 
they  will  take  to  the  road.  Hence  the  decided  difference 
between  the  recognized  minimum  of  wages  for  the  two 
sexes.' 

As  long  as  reckless  marriage  remains  the  rule,  it  is  hard 

'  Smart  (  "  Studies  in  Economics  "  )  explains  this  difference  on  the  theory 
that  men  have  been  strong  enough  to  secure  industrial  gains  which  modern 
competition  offers  them,  while  women's  wages  reflect  the  industrial  con- 
ditions of  a  hundred  years  ago. 


WOMEN'S    WAGES.  4I I 

to  see  an  escape  from  this  state  of  things.  To  forbid  a 
mother  to  work  while  her  little  children  starve  is  out  of 
question.  To  have  the  taxpayers  assume  the  support  of 
all  such  cases  would  result  in  placing  new  burdens  upon 
a  number  of  workers  who  find  it  hard  enough  to  maintain 
themselves  at  present  (compare  §  59).  The  attempt  to 
raise  women's  wages,  either  by  combination  or  by  law,  to  a 
figure  equal  to  those  of  men,  would  apparently  so  dimin- 
ish the  demand  for  their  labor  as  to  leave  many  with 
nothing  to  do.  Nor  could  any  reduction  in  the  hours  of 
female  labor  make  work  enough  to  supply  all  the  com- 
petitors at  remunerative  rates.  A  certain  amount  of  re- 
striction on  the  labor  of  women,  especially  married  women, 
seems  necessary  on  grounds  of  public  health  ;  but  the  grow- 
ing pressure  to  equalize  the  legal  position  of  both  sexes 
is  likely  to  reduce  such  special  legislation  to  a  minimum 
rather  than  to  allow  it  to  expand  into  an  important  limita- 
tion of  the  labor  supply. 

§  457.  A  more  distinct  case  for  public  interference  is 
found  in  the  low  wages  which  prevail  under  the  "  sweat- 
ing system." 

An  employer  who  desires  to  get  his  work  done  as 
cheaply  as  possible,  and  at  the  same  time  to  free  himself 
from  the  trouble  of  supervising  it,  will  often  make  con- 
tracts with  his  subordinates  by  which  he  furnishes  them 
whatever  materials  they  may  need,  and  pays  them  a  stipu- 
lated price  for  their  product,  after  deducting  the  cost  of 
the  materials  used.  Where  this  contract  is  made  with  the 
workmen  as  a  body,  the  system  is  a  good  one.  It  gives 
them  a  stimulus  to  use  the  materials  effectively  and 
economically.  Where  it  is  made  with  an  individual 
workman,  or  subcontractor,  who  hires  his  help  at  whatever 
rates  he  can  persuade  them  to  accept,  its  benefit  is  more 
doubtful.  It  is  good  for  the  employer  and  the  subcon- 
tractor; but  the  men  themselves  claim  that  the  work  is 
harder  and  the  pay  more  niggardly  than  when  they  are 


412  PROTECTIVE  LEGISLATION. 

hired  by  the  capitalist  directly.  They  complain  that 
when  every  penny  saved  in  the  workrooms  goes  to  the 
foreman — which  is  what  the  subcontract  system  accom- 
plishes —his  supervision  is  so  intense  and  his  bargaining 
so  close  as  to  make  the  lot  of  those  under  him  a  hard  one. 
But  as  long  as  the  labor  is  performed  in  the  factory  itself, 
the  system  does  not  develop  its  worst  features.  These 
are  shown  when  the  work  is  done  outside,  in  isolated 
shops  or  in  tenements  which  some  people  are  so  unfortu- 
nate as  to  call  homes.  This  method  of  employment  is 
known  as  the  sweating  system.  It  is  perhaps  seen  at  its 
worst  in  the  ready-made  clothing  trade,  where  the  length 
of  the  hours,  the  shortness  of  the  wages,  and  the  unsani- 
tary conditions  of  the  employment  combine  to  form  an 
appalling  picture. 

§  458.  The  evils  of  the  sweating  system,  by  which  the 
contractor  makes  money  from  the  misery  of  those  below 
him,  are  made  the  ground  of  a  severe  indictment  against 
free  competition.  Yet  the  sweating  system  is  really  an 
illustration  of  the  evils  which  arise  from  the  absence  of 
competition,  not  from  its  presence.  Put  people  in  a 
factory  where  there  is  a  market  rate  of  wages  and  they 
obtain  the  benefit  of  the  modern  competitive  process. 
Leave  them  isolated  and  they  become  the  victims  of  the 
employer's  shrewdness  in  bargaining.  We  hear  much  said 
about  the  advantage  of  the  capitalist  in  his  competition 
with  the  laborer.  The  capitalist  does  7iot  compete  with 
the  laborer.  Laborer  competes  with  laborer  and  capitalist 
with  capitalist.  Where  competition  exists,  the  laborer 
gets  the  benefit  of  a  market  rate  made  by  different  capi- 
talists. Their  strength  is  a  source  of  benefit  to  him.  It 
is  where  competition  does  not  exist,  and  bargaining  takes 
its  place,  that  the  relative  weakness  of  the  laborer  makes 
itself  felt.  The  absence  of  competition  in  wages  gives 
rise  to  oppression  as -unjustifiable  as  that  which  arises 
from  the  absence  of  competition  in  loans :  and  laws  for 


THE   SWEATING  SYSTEM.  413 

the  protection  of  the  laborer  in  these  cases  may  have  the 
same  justification  as  those  for  protecting  the  ignorant 
borrower  (§  155). 

The  sweating  system  is  in  fact  a  remnant  of  the  domes- 
tic system  of  industry  which  prevailed  until  the  develop- 
ment of  the  steam  engine  concentrated  so  much  of  our 
labor  in  factories.  It  represents  a  survival  into  modern 
times  of  the  evils  incident  to  earlier  conditions  of  em- 
ployment ;  evils  which  are  doubtless  increased  by  every 
narrowing  of  the  margin  of  general  profits  that  gives 
the  contractor  an  excuse  for  correspondingly  depressing 
wages,  and  which  are  accentuated  by  the  contrast  in 
prosperity  between  those  who  have  gained  the  benefits 
of  competition  and  those  who  remain  under  the  severer 
bondage  of  the  older  methods. 

§  459.  The  evils  thus  far  described  can  probably  best 
be  dealt  with  by  the  sanitary  and  educational  authorities, 
rather  than  by  special  labor  legislation.  The  dangers  to 
public  health  in  child  labor,  in  unregulated  female  labor, 
and  in  the  worst  form  of  contract  labor,  are  so  conspicuous 
that  proposals  for  legislative  restriction  can  most  effec- 
tively be  based  on  this  ground.  But  there  are  other 
forms  of  cheap  labor  where  the  evils,  real  or  alleged,  are 
more  distinctively  economic.  One  of  these  is  convict 
labor. 

In  order  to  relieve  the  taxpayers  of  a  part  of  the  burden 
of  supporting  prisoners,  it  is  in  many  places  customary  to 
set  those  prisoners  at  work  for  private  contractors.  There 
are  three  ways  in  which  this  is  done.  Either  the  convicts 
are  placed  directly  under  the  charge  of  a  contractor  at  a 
fixed  rate  per  day,  the  contractor  taking  the  responsibility 
for  the  care  of  the  prisoners  and  getting  all  the  work  he 
can  out  of  them  {lease  systent)  ;  or  labor  within  the  prison 
walls  is  placed  at  the  disposal  of  the  contractor,  at  a 
fixed  rate  per  day,  the  contractor  having  agents  in  the 
prison  to  see  that  the  work  is  properly  carried  on  {contract 


414  PROTECTIVE  LEGISLATION. 

system)  ;  or  the  results  of  the  labor  are  offered  to  the  con- 
tractor at  a  fixed  price  per  unit  of  product,  the  supervision 
being  in  the  hands  of  the  prison  authorities  {piece price 
system).  The  first  of  these  methods  is  undoubtedly  the 
worst  for  the  criminals,  as  it  gives  all  sorts  of  opportuni- 
ties for  abuse.  The  third  is  probably  the  best ;  but  the 
difficulty  of  securing  prison  supervisors  who  have  at  once 
the  qualities  of  good  manufacturers  and  good  wardens  is 
so  great  that  it  prevails  less  frequently  than  the  contract 
system.  The  effect  of  the  three  systems  on  outside  labor 
is  substantially  the  same. 

§  460.  Convict  labor  is  not  a  very  important  matter  in 
actual  bulk.  The  number  of  convicts  set  at  work  in  the 
United  States  in  1886  was  only  45,000,  and  their  output 
per  day  was  on  an  average  less  than  half  that  of  free 
laborers.  But  the  effect  of  this  convict  labor  in  de- 
pressing wages  may  be  much  greater  than  that  of  a  corre- 
sponding amount  of  free  labor.  There  are  two  reasons 
for  this.  In  the  first  place,  convict  labor  is  pauperized. 
The  community  pays  for  its  maintenance  whether  it  is 
efficient  or  not.  If  one  free  laborer  competes  with  an6ther 
and  his  wages  fall  below  the  price  necessary  for  his  sup- 
port, he  ceases  to  be  a  competitor.  He  must  die,  migrate, 
or  find  some  other  occupation  ;  and  his  removal  enables 
the  more  efficient  laborer  to  command  a  higher  price. 
But  the  supply  of  convict  labor  is  subject  to  no  such  re- 
strictions. If  the  convict,  as  is  habitually  the  case,  earns 
too  little  for  his  own  support,  the  deficiency  is  made  up 
at  the  taxpayer's  expense  and  the  competition  continues 
with  unremitting  vigor.  It  is  a  subsidized  contest  of 
worse  elements  against  better  ones.  And,  in  the  second 
place,  this  pauperized  labor  can  be  arbitrarily  thrown  from 
one  trade  to  another,  while  free  labor  cannot.  An  increase 
in  the  supply  of  free  labor  in  any  particular  line  is  usually 
a  gradual  one.  If  free  laborers  come  into  a  trade  in  larger 
numbers  than  usual,  we  may  be  almost  certain  that  this 


PRISON  LABOR.  415 

trade  affords  exceptional  opportunities  for  earning  money 
and  that  the  laborers  already  engaged  in  that  trade  enjoy 
more  than  an  average  share  of  prosperity.  But  in  the  case 
of  convict  labor  we  have  no  such  certainty.  The  manu- 
facturers may  employ  a  large  number  of  convict  laborers 
in  a  trade  where  the  rate  of  wages  offered  no  special  in- 
ducements to  free  labor  and  where  those  who  are  already 
in  the  trade  suffer  severely  from  the  additional  supply. 

§  461.  Several  remedies  have  been  proposed  for  this 
evil.  There  are  some  who  advocate  the  total  abolition  of 
prison  labor.  This  would  be  extremely  undesirable.  It 
would  have  a  bad  effect  on  the  convicts  themselves,  be- 
cause it  would  lead  to  an  increase  of  idleness  inside  the 
prison  walls,  and  would  not  leave  the  prisoner  with  a 
means  of  earning  a  living  when  he  has  completed  his 
sentence.  It  would  thus  make  him  a,  permanent  burden 
on  society,  and  would  increase  the  probability  of  his  re- 
lapsing into  criminal  habits  from  lack  of  any  honest  chance 
of  supporting  himself.  It  would  also  have  a  bad  effect  on 
the  taxpayers.  The  additional  expense  of  maintaining 
the  prison,  due  to  the  abolition  of  the  contract  system, 
would  cause  a  reduction  in  the  amount  of  funds  that 
would  otherwise  be  added  to  the  capital  of  the  com- 
munity and  that  would  become  available  for  the  support 
of  free  labor  in  the  year  following.  While  the  abolition 
of  the  contract  system  might  thus  raise  wages  in  the  par- 
ticular trade  that  had  felt  its  influence  adversely,  it  would 
be  almost  certain  to  lower  general  wages  by  increasing  the 
expenses  and  lessening  the  receipts  of  the  community  as  a 
whole. 

Others  advocate  the  restriction  of  prison  labor  to  work 
which  can  be  carried  on  by  hand.  The  prisoner  would 
thus  be  unable  to  compete  with  machine  labor,  because 
he  would  have  less  useful  appliances  at  command.  The 
objections  to  this  plan  differ  only  in  degree  from  those 
which  have  been  urged  against  abolition  of  prison  labor. 


4l6  PROTECTIVE  LEGISLATION. 

It  would  not  provide  the  prisoner  with  a  means  of  liveh'- 
hood  when  he  leaves  the  prison,  because  he  would  have 
learned  only  antiquated  methods  of  work  which  cannot 
compete  with  those  in  use  to-day.  Nor  would  it  give  the 
taxpayers  as  great  a  relief  from  burden  as  is  obtained 
under  the  existing  system.  It  would  therefore  involve  a 
loss  of  capital  to  the  community  as  a  whole,  which,  though 
not  so  great  as  that  which  we  should  suffer  through  entire 
abohtion  of  industrial  labor  in  prisons,  would  nevertheless 
be  very  considerable. 

Others  advocate  the  retention  of  prison  labor,  but  pro- 
pose doing  away  with  the  contractor  altogether.  They 
would  have  the  laborers  supervised  by  the  prison  authorities, 
as  under  the  piece  price  system  ;  but  instead  of  selling  the 
product  to  a  contractor  at  a  fixed  rate  they  would  put  it 
on.  the  market  at  whatever  price  it  could  command.  This 
method,  which  is  known  as  the  public  account  system, 
would  intensify  any  evils  which  result  from  contract  labor. 
It  would  have  an  opposite  effect  from  the  one  intended. 
It  would  virtually  pauperize  the  capital  as  well  as  the 
labor  employed.  The  state  would  sell  the  goods  for 
what  it  could  get,  whether  the  price  covered  the  expense 
of  production  or  not, — a  thing  which  the  contractor  can- 
not continue  to  do  for  any  considerable  length  of  time. 
Where  the  private  contractor  for  prison  labor  loses 
money  through  the  low  efficiency  of  prison  labor,  he  ulti- 
mately has  to  stop  business ;  but  the  state,  working  on 
the  public  account  system,  would  be  subject  to  no  such 
restriction  and  might  continue  indefinitely  to  produce  and 
sell  goods  at  a  loss. 

It  is  urged  in  favor  of  the  public  account  system  that 
the  profits  now  obtained  by  private  contractors  would 
accrue  to  the  state.  But  these  profits  are  for  the  most 
part  illusory.  Experience  shows  that  employers  of  prison 
labor  are  not  conspicuously  successful.  Its  apparent 
cheapness  when  measured  by  the  day,  does  not  prov.e 


IMMIGRATION-   UNDER   CONTRACT.  417 

that  its  results  are  cheap  when  measured  by  the  piece. 
The  prison  laborer  at  fifty  cents  a  day  usually  makes  less 
than  one  third  as  many  products  as  the  free  laborer  at  a 
dollar  and  a  half.  Only  where  prison  labor  is  employed 
in  work  to  be  used  by  the  government  itself,  has  the  pub- 
lic account  system  proved  even  moderately  satisfactory. 

The  best  means  of  guarding  against  the  evils  of  convict 
labor  is  to  distribute  it  among  different  industries  in  such 
a  way  that  no  one  trade  shall  suffer  unduly  from  a  sudden 
influx  of  prison  competition.  If  this  matter  is  attended 
to,  the  loss  to  laborers  in  any  particular  trade  from  the 
application  of  the  contract  or  piece  price  system  is  rela- 
tively slight.  It  is  outweighed  by  the  gain  to  the  public 
in  utilizing  men  who  would  otherwise  be  idle,  and  in  teach- 
ing the  means  of  earning  an  honest  living  to  those  who 
would  otherwise  be  forced  to  relapse  into  a  criminal 
career. 

§  462.  The  case  of  immigration  under  contract  bears 
some  analogy  to  that  of  prison  labor.  An  employer  may 
readily  import  a  large  number  of  foreign  laborers  into  a 
trade  where  wages  are  not  particularly  high,  but  v/here 
he  sees  an  opportunity  of  utilizing  more  labor  to  advan- 
tage. The  fact  that  the  employers  and  not  the  laborers 
take  the  initiative  in  such  contracts,  makes  this  case  differ- 
ent from  that  of  the  ordinary  migrations  of  labor  from 
place  to  place  or  trade  to  trade.  It  may  be  argued  that 
if  the  employer  can  profitably  contract  for  foreign  labor 
of  this  kind,  it  proves  that  the  country  wants  such  labor. 
But  there  are  a  considerable  number  of  instances  which 
go  to  show  that  the  country  does  not  always  want  such 
labor ;  that  the  private  gain  to  the  employer  is  not 
attended  by  corresponding  gain  to  the  community  as  a 
whole ;  and  that,  to  the  laborers  already  working  in  the 
trade,  the  sudden  loss,  against  which  they  have  not  had 
time  to  make  provision,  may  prove  a  very  serious  one. 
Advocates  of  unrestricted  immigration  say  that  this  loss 


4l8  PROTECTIVE  LEGISLATION. 

is  one  of  the  incidents  of  industrial  progress,  and  that  the 
laborers  are  subjected  to  precisely  the  same  evils  by  the 
sudden  introduction  of  new  machinery.  But  as  a  matter 
of  equity  between  different  classes  of  the  community  the 
cases  of  immigration  and  of  machinery  are  not  parallel. 
In  using  new  machinery,  the  employer  takes  far  greater 
risks  of  failure  upon  himself.  If  the  experiment  proves 
unprofitable,  he  bears  the  whole  loss.  But  in  importing 
foreign  laborers  under  contract,  his  loss  in  case  of  ill-suc- 
cess is  not  necessarily  much  greater  than  the  price  he  has 
paid  for  their  passage.  The  community  must  bear  the 
burden  of  their  subsequent  support.  On  grounds  of 
economic  expediency  there  is  at  least  a  fair  case  in  favor 
of  legislation  which  shall  restrict  the  right  of  the  capitalist 
to  import  contract  labor. 

§  463.  In  the  case  of  immigration  without  contract,  the 
dangers  are  political  and  social  rather  than  economic  in 
their  character.  The  worst  form  of  immigration  is  that 
which  has  been  "  assisted."  The  authorities  in  certain 
parts  of  Europe,  either  from  a  wish  to  get  rid  of  their 
superfluous  population,  or  in  the  hope  of  relieving  them- 
selves of  the  support  of  criminals,  paupers,  or  insane  per- 
sons, have  in  times  past  sent  their  undesirable  members 
to  foreign  parts,  finding  it  cheaper  to  spend  a  few  dollars 
'outright  in  paying  their  steamship  fare  than  to  continue 
supporting  them  at  home.  Every  community  has  a  right 
to  defend  itself  against  immigration  of  this  kind.  Down 
to  the  close  of  the  last  century  this  right  was  exercised 
with  the  utmost  vigilance.  By  the  English  Acts  of  Set- 
tlement each  parish  was  given  protection  against  the  dan- 
ger of  assisted  migration  from  neighboring  parishes,  and 
similar  restrictions  were  applied  with  much  greater  sever- 
ity in  Continental  Europe.  The  nineteenth  century  has 
witnessed  a  reaction  against  this  policy  of  repressing  free 
movements  of  population  ;  but  the  necessity  for  vigilance 
in  these  matters  has  not  wholly  passed.     While  the  growth 


INFLUX   OF  FOREIGN  RACES.  419 

of  international  comity  may  have  lessened  the  danger  of 
an  influx  of  foreign  criminals,  the  development  of  cheap 
transportation  has  increased  the  danger  of  an  even  greater 
influx  of  foreign  paupers.  We  have  to  deal  with  a  large 
number  of  immigrants  who,  though  not  assisted  by  foreign 
governments,  have  been  induced  by  false  representations 
of  agents  of  the  steamship  companies  to  take  tickets  to 
the  United  States,  although  they  had  no  good  prospect 
of  supporting  themselves  on  this  side  of  the  water.  The 
laws  of  the  United  States  against  convict  and  pauper 
labor  seem  amply  justified  by  the  facts, — far  more  clearly 
so  than  the  contract  labor  law. 

§  464.  To  a  popular  government  large  foreign  immigra- 
tion, even  when  otherwise  unobjectionable,  is  attended 
with  special  evils  which  arise  from  the  admission  of  im- 
migrants to  political  power.  When  the  Irish  began  to 
emigrate  in  large  numbers  in  the  fifth  decade  of  our 
national  existence,  a  great  many  good  people  thought 
that  the  whole  country  would  go  over  to  Catholicism, 
and  that  before  the  end  of  the  nineteenth  century  the 
Roman  Pontificate  and  the  Spanish  Inquisition  would 
both  have  their  headquarters  in  New  York  City.  But  the 
Irish  immigration  has  been  gradually  assimilated  without 
any  revolution  or  any  serious  change  of  institutions.  It 
has  doubtless  increased  the  difficulties  of  municipal  gov- 
ernment in  some  of  our  large  cities,  but  it  has  not  ren- 
dered it  impossible  for  the  country  as  a  whole  to  remain 
self-governing  and  free.  Nor  does  it  seem  likely  that  the 
existing  immigration  of  races  of  lower  grades  than  the 
Irish  is  so  large  as  to  prevent  our  country  from  dealing 
with  them  successfully.  The  ability  of  the  United  States 
to  assimilate  foreign  elements  has  proved  far  greater  than 
was  anticipated  by  many  observers.  But  this  ability  is 
by  no  means  unlimited.  Every  nation  needs  to  have  a 
certain  homogeneity  of  law  and  morals.  It  can  assimilate 
a   certain    number   of   immigrants   who    have  not  been 


420  PROTECTIVE  LEGISLATION. 

brought  up  in  its  own  traditions  ;  but  if  the  rate  of  such 
immigration  becomes  too  rapid  there  is  danger  that  the 
old  national  habits  will  be  destroyed.  The  more  alien 
the  thoughts  and  habits  of  the  immigrant  races,  the  more 
serious  is  this  danger.  The  agitation  against  Chinese 
immigration,  so  far  as  it  was  justified  at  all,  was  justified 
on  this  ground. 

§  465.  On  purely  economic  grounds,  the  case  in  favor 
of  unrestricted  immigration  is  much  stronger  than  people 
commonly  suppose.  Voluntary  and  unassisted  immigra- 
tion is  generally  of  a  pretty  high  grade.  It  may  be  falla- 
cious to  compute  the  value  of  an  immigrant  to  the  United 
States  by  what  it  has  cost  to  produce  him  at  home  or  by 
what  it  would  have  cost  to  produce  and  train  him  here  ; 
but  there  can  be  no  doubt  that  the  man  who  has  saved 
money  enough  and  has  shown  enterprise  enough  to  take 
a  journey  of  three  or  four  thousand  miles,  has  certain  first- 
rate  qualities  that  are  likely  to  make  him  a  useful  citizen 
to  the  United  States.  Though  the  exhaustion  of  our 
public  land  supply  is  diminishing  the  immediate  and 
visible  need  for  such  laborers,  we  still  have  enough  un- 
used land  and  unused  opportunities  to  make  every  able- 
bodied  workman  constitute  an  addition  to  our  industrial 
strength. 

Even  the  immigrants  of  a  lower  class,  when  they  are 
not  so  weak  or  dependent  as  to  constitute  a  political  and 
social  menace  to  our  national  life,  can  render  services 
which  are  of  great  value  to  the  community.  By  doing 
the  low-grade  work  they  may  diminish  the  chance  for 
Americans  of  low  grade  to  maintain  themselves ;  but  they 
correspondingly  increase  the  opportunities  for  Americans 
of  higher  grade.  If  we  get  our  poorest  work  done  cheaply, 
by  men  who  are  able  to  do  it  economically,  all  the  rest  of 
the  country  has  the  benefit  of  the  products  of  their  labor 
at  less  sacrifice  than  would  otherwise  be  involved.  It  is 
hardly    fair   to   say   that  "  the   competition   that  comps 


SOCIAL  EFFECTS  OF  IMMIGRATION.  42 1 

through  immigration  has  the  tendency  to  lower  the 
standard  of  living  in  this  country,"  or  that  "  the  outcome 
of  such  competition  will  be  to  reduce  our  whole  laboring 
class  to  the  standard  of  life  of  these  newcomers."  This 
has  certainly  not  been  its  outcome  in  the  past.  The  re- 
sult of  the  introduction  of  a  number  of  low-grade  laborers 
has  been  not  inaptly  compared  to  the  effect  produced  on 
a  pyramid  by  introducing  a  new  layer  at  the  bottom. 
The  pressure  at  this  bottom  layer  becomes  more  intense 
than  ever  before,  but  the  general  mass  is  raised  instead  of 
being  lowered. 

With  immigration  and  with  the  stimulus  which  it  has 
given  to  progress  by  compelling  native  workers  to  rise  or 
to  die,  the  country  as  a  whole  has  been  rising.  It  is 
doubtful  whether  it  would  have  risen  nearly  as  fast  with- 
out such  a  stimulus.  The  removal  of  a  cause  which  has 
done  so  much  for  our  industrial  progress  in  the  past 
might  well  lead  to  stagnation  rather  than  to  higher  civili- 
zation. Much  of  the  opposition  to  immigration  comes 
from  the  men  who  stand  in  the  way  of  such  progress ; 
men  who  are  incapable  of  rising  into  the  higher  grades ; 
men  who,  if  they  work  at  all,  are  fitted  only  for  such  work 
as  foreign  immigrants  do,  and  who  fail  to  do  that  work 
well.  There  may  have  been  good  reasons  for  putting  a 
stop  to  Chinese  immigration  ;  but  the  average  Chinese 
immigrant,  industrious  and  sober,  was  far  more  useful  to 
the  community  at  the  time  and  had  far  more  possibilities 
of  serving  the  community  in  the  future,  than  the  average 
persecutor  who  threw  stones  at  him. 

§  466.  The  movement  to  shut  out  foreign  products  by  a 
high  tariff  has  generally  proved  stronger  than  the  move- 
ment to  shut  out  foreign  labor  by  laws  regulating  immi- 
gration. In  restricting  immigration  the  superficial  and 
immediate  interests  of  the  capitalists  have  been  opposed 
to  those  of  the  laborers  ;  in  restricting  the  importation  of 
the  products  of  industry  the  interests  of  the  two  classes 


422  PROTECTIVE  LEGISLATION. 

have  seemed  to  go  hand  in  hand.  If  the  legislature 
threatens  to  prevent  the  importation  of  foreign  laborers  it 
antagonizes  the  man  who  wishes  to  employ  them.  But 
if  it  offers  to  prevent  the  importation  of  foreign  pro- 
ducts it  gives  the  employer  who  has  money  to  invest  in 
the  production  of  similar  goods  an  interest  in  behalf  of 
the  proposed  measure  fully  as  great  as  that  of  the  laborers. 
Therefore  many  capitalists  who  have  been  inclined  to  op. 
pose  laws  which  restrict  the  movements  of  laborers,  as 
being  violations  of  the  principles  of  free  government,  have 
been  equally  inclined  to  welcome  laws  which  restrict  the 
importation  of  products,  as  part  of  a  system  of  protection 
to  home  industry  (compare  §  150). 

§  467.  It  is  beyond  the  scope  of  this  book  to  give  any- 
thing like  a  history  of  the  world's  tariff  policy.  Down  to 
the  end  of  the  last  century  protective  taxes  were  accepted 
as  a  matter  of  course.  The  country  was  fortunate  that 
had  custom  houses  on  its  national  borders  only,  and  did 
not  find  district  separated  from  district  by  barriers  against 
trade.  The  work  of  the  physiocrats  and  of  Adam  Smith 
paved  the  way  for  reform  in  this  matter ;  the  French 
Revolution  and  the  Napoleonic  wars,  by  uniting  people 
into  larger  political  groups,  helped  to  bring  more  liberal 
ideas  into  play  ;  while  the  great  English  Free  Trade 
movement,  effectively  pressed  by  Cobden  and  his  friends, 
which  culminated  in  the  Sir  Robert  Peel's  Corn  Law  of 
1846,  gave  the  world  an  example  of  radical  departure  from 
a  time-honored  method  of  protective  taxation.  Napoleon 
III.  and  his  minister  Chevalier  made  a  still  further  pro- 
gress in  the  same  direction,  by  a  system  of  reciprocity 
treaties  devised  with  the  intention  of  guiding  the  com- 
mercial world  in  the  direction  of  freer  trade.  The  United 
States,  which  had  oscillated  between  high  and  low  duties, 
seemed  committed  to  the  latter  policy  by  the  undoubted 
success  of  the  tariff  of  1847  and  of  the  Canadian  recipro- 
city treaty  of  1854.     But  a  general  reaction  set  in  when  it 


TARIFF  POLICY.  423 

was  least  anticipated.  Wars  on  both  sides  of  the  Atlantic 
brought  out  feelings  of  national  antagonism  with  unex- 
pected force,  and  led  to  the  adoption  of  a  tariff  policy  which 
reflected  these  feelings.  It  was  first  and  most  conspicu- 
ously exemplified  in  the  United  States :  where  the  war 
duties  of  1861,  1862,  and  1864,  originally  levied  for  pur- 
poses of  revenue,  were  allowed  to  stand  after  the  restora- 
tion of  peace  and  the  abolition  of  the  corresponding 
internal  revenue  taxes  ;  where  the  efforts  at  reduction  in 
1872  proved  transient,  and  the  acts  of  1883  and  1890  only 
emphasized  the  protective  features  of  the  tariff  system. 
It  has  been  manifested  both  in  France  and  Germany  with 
increasing  force  in  the  years  since  the  war  of  1870;  nor 
has  any  large  power  in  Continental  Europe  been  exempt 
from  its  influence.  The  English  colonies  have  felt  the 
effect  of  the  same  movement ;  and  even  in  England  itself 
under  the  guise  of  an  agitation  for  "  fair  trade,"  there 
have  been  a  few  appeals  for  the  renewal  of  protective 
duties. 

§  468.  There  are  three  distinct  lines  of  argument  for  a 
protective  tariff.  The  first,  which  claims  that  protection 
makes  high  wages  by  keeping  money  at  home  and  by 
directly  creating  an  increased  demand  for  labor,  is  popular 
and  superficial.  The  second,  which  urges  the  indirect 
economic  advantages  of  diversification  of  industry,  is  less 
popular  but  more  substantial ;  and  the  same  may  be  said 
of  the  third,  which  looks  at  protection  as  a  military  neces- 
sity forced  upon  a  nation  by  the  rivalry  or  hostility  of  its 
neighbors. 

§  469.  The  popular  argument  for  protection  is  a  sur- 
vival of  the  mercantile  theory  of  political  economy.  This 
theory  holds  that  a  nation  grows  rich  by  making  money, 
— by  having  a  large  income  and  small  expenses.  The 
exports  of  a  nation  correspond  to  the  income  of  an  indi- 
vidual ;  the  imports  of  the  nation  correspond  to  the  ex- 
penses of  an  individual.     The  national  wealth  is  therefore 


424  PROTECTIVE  LEGISLATION. 

promoted  by  an  increase  of  exports  and  a  diminution  of 
imports.  Every  excess  of  exports  over  imports  represents 
an  addition  to  the  accumulated  capital  of  the  country. 
A  tariff  laid  for  the  purpose  of  preventing  the  import  of 
things  which  can  be  made  at  home  is  a  means  of  increas- 
ing this  capital.  Such  a  tariff,  it  is  urged,  is  not  only 
beneficial  to  the  community  as  a  whole,  but  especially  so 
to  the  laborers.  For  money,  which  was  formerly  em- 
ployed in  buying  goods  from  abroad,  will,  under  the 
operation  of  a  protective  tariff,  be  used  to  give  employ- 
ment to  laborers  at  home.  All  such  avoidance  of  foreign 
expenditure  means,  therefore,  an  increase  in  the  wealth  of 
the  country  and  in  the  income  of  the  laborers. 

Carrying  the  same  principle  still  further  it  is  urged  that 
bounties  should  be  given  in  those  industries  where  an 
effective  tariff  would  make  the  price  to  the  consumer  too 
high, — for  instance,  in  the  case  of  sugar, — or  where  it  is 
desired  to  stimulate  our  production  for  foreign  trade  as 
well  as  for  domestic  trade.  But  there  is  more  reluctance 
to  give  bounties  than  to  impose  tariffs,  because  the  tax 
arising  from  a  high  tariff  is,  directly  at  any  rate,  a  source 
of  revenue  to  the  government ;  while  the  payment  of  a 
large  bounty  involves  an  expenditure  which  can  be  met 
only  by  levying  taxes  whose  burden  is  more  obvious 
than  that  of  a  tariff  and  therefore  more  unpopular.' 

§  470.  This  view  of  the  effects  of  protection  is  a  very 
superficial  one.  In  the  great  majority  of  cases  it  is  im- 
practicable for  a  nation  to  "  make  money  "  in  this  way. 
It  will  pay  for  its  imports  by  its  exports  and  vice  versa. 

'  The  subject  of  bounties  (and  indeed  the  whole  theory  of  protection)  is 
well  treated  by  C.  Gide,  "  Principles  of  Political  Economy,"  book  ii.,ch.  vii. 
For  bounties  to  shipping  see  §  490. 

A  bounty  brings  the  burden  of  supporting  the  favored  industry  upon  the 
shoulders  of  the  whole  body  of  taxpayers.  It  is  therefore  theoretically  more 
equitable  than  a  protective  tariff  which  taxes  the  consumers  of  certain  articles 
only.  But  all  our  methods  of  taxation  are  so  bad  in  many  of  their  workings 
that  this  theoretical  equity  is  not  very  well  realized  in  practice.  ^ 


FUTILITY  OF  ACCUMULATING  MONEY.  425 

An  attempt  to  diminish  the  imports  and  maintain  or  in- 
crease the  exports  for  any  considerable  period  of  years  is 
generally  futile.  The  accumulation  of  money  in  one 
country  and  its  withdrawal  from  another  will  cause  high 
prices  to  prevail  in  the  former  country  and  low  prices  in 
the  latter.  The  former  country  thus  becomes  a  good 
market  to  sell  in  and  a  bad  market  to  buy  in.  People 
will  ship  more  goods  to  such  a  country  than  they  would  if 
the  high  prices  did  not  prevail,  and  will  take  fewer  goods 
from  it.  They  will  withdraw  gold  from  the  place  where 
prices  are  high,  for  use  in  the  place  where  prices  are  low. 
The  experience  of  four  centuries  has  demonstrated  the 
futility  of  trying  to  interfere  with  this  movement  of  specie. 
Although  the  exportation  of  gold  has  often  been  pro- 
hibited under  the  severest  penalties,  it  has  nevertheless 
continued.  Although  statesmen  have  made  every  effort 
to  modify  or  prevent  the  operation  of  this  automatic 
movement,  by  which  prices  in  different  communities  seek 
their  natural  level,  the  results  of  their  efforts  have  been 
strikingly  small. 

§471.  In  the  few  cases  where  these  efforts  to  accumu- 
late money  are  in  any  degree  successful,  most  of  the 
expected  good  proves  illusory.  Higher  nominal  wages 
combined  with  higher  prices  leave  the  different  classes  of 
the  community  in  the  same  relative  position  that  they 
held  before.  The  real  demand  for  labor  is  not  measured 
by  the  accumulated  supply  of  money,  but  by  the  com- 
modities which  the  laborer  can  buy  with  the  money  he 
receives.  If  every  dollar  in  the  United  States  were  cut  in 
halves  and  each  half  were  called  a  dollar,  there  would  be  a 
larger  nominal  supply  of  money  but  no  real  increase  in 
wages.  When  an  increase  of  money  is  the  result  of  better 
business  methods,  it  is  a  good  thing ;  but  when  we  seek 
to  reverse  this  process  and  obtain  better  business  by  put- 
ting more  money  into  circulation,  we  are  simply  playing 
with  figures. 


426  PROTECTIVE  LEGISLATION. 

So  far  as  the  increase  of  money  is  obtained  at  a  sacrifice 
of  useful  things  which  the  money  would  buy,  it  may  prove 
a  positive  disadvantage  to  the  laborer.  If  we  succeed  for 
a  few  years  in  arbitrarily  checking  our  imports,  we  may 
find  ourselves  with  more  money  and  less  of  certain  other 
things  which  would  help  our  productive  laborers  more 
than  money  does.  In  this  respect,  the  mercantile  system 
of  political  economy  may  not  inaptly  be  characterized  as 
a  miserly  system.  It  would  make  the  policy  of  the  nation 
similar  to  that  of  a  miser  rather  than  that  of  a  wise  mer- 
chant. The  successful  business  man  is  not  the  one  who 
sells  the  most  and  spends  the  least,  but  the  one  who 
spends  his  income  on  things  which  will  permanently  in- 
crease  his  earning  capacity  in  the  future.  The  successful 
nation  is  not  the  one  which  strives  to  get  the  most  money, 
but  the  one  which  invests  most  of  its  income  in  increased 
productive  resources,  by  purchasing  things  which  other 
nations  are  able  to  place  at  its  disposal,  that  will  either 
increase  the  real  wages  of  the  laborer  to-day  or  give  better 
chances  for  efficient  exercise  of  labor  in  the  immediate 
future. 

§  472.  But  it  may  be  urged  that  countries  like  the 
United  States,  which  have  borrowed  large  amounts  of 
capital,  may  profitably  employ  an  excess  of  exports  over 
imports  in  paying  their  debts.  A  debtor  should  under- 
^take  to  sell  more  than  he  buys,  and  spend  the  difference, 
not  in  extending  his  personal  consumption,  not  in  making 
additional  investments,  but  in  cancelling  past  obligations 
and  placing  himself  in  a  position  of  independence.  This 
is  in  a  measure  true.  But  the  adoption  of  such  a  policy 
by  an  individual  indicates  that  his  business  has  pretty 
nearly  reached  the  limit  of  its  growth.  Until  this  point 
is  attained,  he  will  find  it  more  profitable  to  use  his  sur- 
plus income  in  widening  the  scope  of  his  operations  than 
in  paying  his  debts.  The  conspicuously  successful  leader 
in  commercial  enterprise  is  not  occupied  with  restricting 


THE  BALANCE   OF   TRADE.  427 

his  liabilities,  but  with  increasing  his  assets.  As  long  as 
he  can  borrow  capital  at  a  low  rate  and  use  it  with  large 
profit,  he  will  care  less  to  diminish  his  obligations  than  to 
enlarge  his  means  of  meeting  them.  The  United  States 
is  in  a  position  of  this  kind.  While  it  is  a  satisfaction  to 
pay  our  debts,  it  is  a  greater  satisfaction  to  increase  our 
resources.  The  years  which  show  the  greatest  excess  of 
exports  over  imports  have  not  always  been  the  years  of 
conspicuous  industrial  prosperity. 

§  473.  The  evils  resulting  from  an  adverse  balance  of 
trade, — /.  e.,  an  excess  of  imports  over  exports — are  much 
exaggerated.  As  was  clearly  pointed  out  by  Daniel 
Webster,  a  slight  adverse  balance  represents  a  normal 
and  healthful  condition  of  commerce.  If  we  ship  goods 
worth  $1,000,000  at  New  York  and  sell  them  for  $1,100,000 
in  London,  we  are  in  a  position  to  bring  back  goods  worth 
$100,000  more  than  those  we  shipped.  The  possibility  of 
selling  our  goods  at  a  profit  is  the  best  indication  of  de- 
mand for  the  products  of  our  labor.  Of  course  it  is  con- 
ceivable that  we  should  bring  back  the  $100,000  in  specie. 
But  a  very  slight  movement  of  this  kind  would  cause  a 
redundance  of  money  in  New  York  and  a  scarcity  in 
London.  The  difference  of  price  levels  thus  created 
would  make  further  exports  difficult,  and  would  diminish 
instead  of  increasing  the  demand  for  the  products  of  our 
labor.  There  may  be  times  when,  owing  to  the  precari- 
ous condition  of  its  currency,  a  nation  needs  specie  more 
than  goods,  and  when  imports  of  coin  are  of  more  conse- 
quence to  it  than  any  other  form  of  capital.  But  these 
cases  are  exceptional.  The  history  of  the  mercantile  sys- 
tem (§  9),  enforced  as  it  was  by  the  efforts  of  the  ablest 
European  statesmen  for  two  centuries,  goes  to  show  the 
fatuity  of  trying  to  increase  a  country's  supply  of  gold 
by  statutory  restrictions  either  on  the  movement  of  the 
metal  or  on  that  of  the  commodities  for  which  it  is  ex- 
changed. 


428  PROTECTIVE  LEGISLATION. 

A  country  which  mines  more  gold  than  it  needs  for  its 
immediate  use,  purchases  other  forms  of  capital  with  the 
surplus.  This  creates  an  apparent  adverse  balance  of 
trade — an  import  of  goods  and  an  export  of  gold  ; — yet 
gold  mines  are  a  source  of  industrial  prosperity  and 
strength.  Even  when  the  United  States  has  an  adverse 
balance  greater  than  the  product  of  its  mines,  it  does  not 
necessarily  mean  that  we  are  losing  gold ;  it  may  mean 
that  foreign  countries  are  using  their  capital  to  develop 
our  natural  advantages  and  are  taking  their  pay  in  se- 
curities. We  are  increasing  our  indebtedness  ;  but  we  are 
yet  more  rapidly  increasing  our  productive  assets  and  our 
effective  employment  of  labor. 

All  payments  to  foreigners — freights,  interest,  invest- 
ment, foreign  travel — tend  to  make  our  balance  of  trade 
look  more  favorable,  because  we  are  usually  compelled  to 
export  goods  to  meet  them.  All  receipts  from  foreigners 
from  the  same  sources  tend  to  make  our  balance  look  less 
favorable,  because  foreigners  generally  cannot  pay  them  in 
gold  without  causing  redundance  and  therefore  ship 
goods  instead.  Yet  the  payments  on  the  whole  represent 
sources  of  weakness,  and  the  receipts  are  all  but  universally 
sources  of  strength.  England  habitually  imports  more 
than  she  exports  because  other  nations  owe  her  so  much 
for  interest  and  freight  charges ;  in  other  words,  because 
she  has  large  invested  capital  and  a  large  merchant  marine. 

§  474.  Unless  a  country  is  in  some  very  exceptional 
financial  position  stoppage  of  imports  means  stoppage  of 
exports,  because  other  nations  cannot  continue  to  buy  its 
goods  unless  they  sell  it  their  own  goods  in  return. 
The  apparent  widening  of  the  home  market  and  in- 
crease of  the  demand  for  labor  caused  by  a  protective 
tariff  is  accompanied  by  a  narrowing  of  the  foreign 
market  and  a  diminution  in  the  production  of  goods  for 
export  which  was  profitable  under  the  old  system. 
What  is  called  the   creation  of  a  new  industry  is  gen* 


DIVERSION  OF  CAPITAL.  429 

erally  nothing  but  the  diversion  of  capital  and  labor 
from  one  industry  to  another.  The  exceptions  to  this 
rule  are  more  apparent  than  real.  We  see  the  opportunity 
for  profitable  employment  of  foreign  capital  and  immi- 
gration of  foreign  labor  in  a  new  line ;  we  fail  to  see  with 
equal  clearness  the  loss  of  some  of  the  opportunities 
which  made  foreign  investment  and  foreign  immigration 
in  old  lines  most  profitable.  If  the  imposition  of  a  high 
tariff  is  followed  by  prosperity  in  manufactures  and  ad- 
versity in  agriculture,  everybody  credits  it  with  the  former 
results,  while  few  look  far  enough  below  the  surface  to 
hold  it  accountable  for  the  latter. 

§  475.  This  diversion  of  labor  and  capital  is,  presumably 
at  any  rate,  from  a  line  where  it  is  more  efficient  to  one 
where  it  is  less  so.  If  there  is  one  line  of  industry  where 
an  American  can  compete  with  the  whole  world  without 
the  aid  of  a  protective  tariff,  and  can  sell  his  goods  in 
foreign  markets  though  he  pays  double  the  wages  given 
by  his  competitors,  it  shows  that  his  natural  advantages 
are  such  that  his  labor  is  more  than  twice  as  efificient  as 
theirs.  If  there  is  another  line  where  he  cannot  compete 
with  the  foreigner  because  of  the  difference  in  American 
wages,  it  shows  that  his  natural  advantages  are  less  than 
this  difference.  The  man  who  exports  goods  must  pro- 
duce so  much  more  than  his  foreign  competitors  that  the 
superior  efficiency  of  each  individual  laborer  covers  not 
merely  the  difference"  in  wages,  but  the  cost  of  transpor- 
tation also  ;  while  the  man  who  is  shut  out  from  the  home 
market  by  his  foreign  competitor  is  employing  labor 
whose  efficiency  is  so  much  less  than  the  difference  in 
wages  that  the  foreign  producer  can  pay  the  cost  of  trans- 
portation '  and  continue  to  undersell  him. 

'  The  current  argument,  that  protection  produces  economy  by  having 
goods  consumed  near  the  point  of  production,  is  in  large  measure  fallacious, 
for  if  people  import  an  article  from  a  distance  it  shows  that  the  difference 
in  economy  between  the  producers  of  an  article  in  tv/o  countries  more  than 
covers  its  cost  of  transportation. 


430  PROTECTIVE  LEGISLATION. 

§  476.  The  popular  argument,  that  by  admitting  goods 
free  of  duty  we  subject  ourselves  to  the  competition  of 
pauper  labor,  ignores  the  fact  that  the  chief  reason  for 
the  difference  between  American  and  European  wages 
lies  in  the  difference  of  efficiency  of  American  and  Euro- 
pean workmen.  The  American  gets  higher  wages  than 
the  European  competitor,  because  he  does  more  work  in 
a  day  (§  Z'^t).  The  cost  per  unit  of  product  in  the  United 
States,  which  is  the  thing  that  determines  power  of  com- 
petition, is  low  in  some  lines  and  high  in  others.  In 
general,  it  is  lower  than  that  of  Europe  in  the  unprotected 
industries,  and  higher  in  those  which  are  protected  either 
by  a  tariff  or,  as  in  the  case  of  personal  services,  by  the 
impossibility  of  transportation. 

If  American  locomotive  works  are  competing  with  Eng- 
lish locomotive  works  in  neutral  markets,  it  shows  that 
the  labor  cost  per  locomotive  in  the  two  countries  is  sub- 
stantially the  same ;  for  if  the  English  labor  cost  were 
higher,  the  American  locomotive  builders  would  drive 
the  Englishmen  out  of  the  market ;  and  conversely,  if  the 
American  labor  cost  were  higher,  the  English  builders 
would  drive  out  their  American  competitors.  Therefore, 
if  the  wages  per  day  of  the  American  workmen  in  these 
lines  are  higher  than  those  of  the  Englishmen,  it  follows 
that  their  efficiency,  as  measured  by  amount  of  work 
done,  is  also  correspondingly  higher.  If  American  clock- 
makers  compete  not  only  in  neutral  markets,  but  in  Eng- 
land itself,  it  shows  that  we  have  an  advantage  in  effi- 
ciency which  more  than  makes  up  for  any  difference  in 
wages.  Industries  of  this  kind  have  nothing  to  fear  from 
pauper  labor.  What  is  apparently  the  dearest  labor  is 
really  the  cheapest.  This  superior  efficiency  of  the 
American  workman  in  these  lines  is  the  cause  of  the 
high  wages  which  he  receives. 

There  are  some  forms  of  labor,  like  that  which  is  em- 
ployed in  the  building  trades  or  like  personal  and  profes- 


CAUSES  OF  HIGH   WAGES.  43 1 

sional  services,  whose  results  must  be  utilized  on  the  spot. 
Laborers  in  these  lines  will  share  in  the  high  wages  en- 
joyed by  workmen  in  those  industries  where  we  have 
natural  advantages,  because  if  the  wages  in  services  or 
building  trades  were  low  while  those  in  exporting  trades 
were  high,  the  workmen  would  nearly  all  desert  the 
former  line  of  employment  and  gravitate  toward  the  lat- 
ter. The  demand  for  services  at  home  on  the  part  of  the 
men  who  make  goods  for  export,  forces  them  to  ofTer 
sufificiently  high  wages  to  induce  men  to  render  those 
services.'  This  result  must  ensue  whether  we  have  a 
tariff  or  not.  We  cannot  have  our  meat  cooked  in  Paris, 
our  boots  blacked  in  London,  or  our  houses  built  in 
Berlin,  no  matter  how  cheap  these  services  may  be  in 
foreign  countries.  The  cook,  the  boot-black,  and  the 
house-builder  therefore  share  in  the  high  wages  due  to 
the  efficiency  of  labor  in  lines  for  which  we  have  a  natu- 
ral advantage.  But  there  are  other  forms  of  industry, 
like  the  manufacture  of  woollen  cloth,  where  we  have  the 
option  of  having  the  work  done  at  home  or  abroad.  In 
the  production  of  woollen  cloth  we  have  little  or  no  ad- 
vantage over  our  foreign  competitors ;  much  less  than 
our  advantage  in  some  other  lines  of  productive  industry. 
If  we  leave  trade  free,  we  shall  export  wheat  and  cotton, 
metals  and  certain  lines  of  manufactures  for  which  we  are 
particularly  skilled,  and  shall  import  woollen  goods  from 
abroad.  If  we  place  a  tariff  on  woollen  manufactures 
which  prevents  their  importation,  we  shall  divert  a  part 
of  our  labor  from  wheat  and  cotton  and  mining  and 
specially  profitable  manufactures  to  a  line  of  industry 
where  we  have  no  especial  advantage,  and  shall  thereby 
reduce  the  average  efficiency  of  our  labor.  When  we  are 
threatened  with  severe  evils  as  a  result  of  admitting  the 

'  In  a  mining  camp  the  cook  will  receive  wages  at  least  as  high  as  the 
average  of  miner's  earnings,  because  if  offered  less  than  this,  he  will  prefer 
to  seek  for  gold  on  his  own  account,  instead  of  staying  at  home  to  cook. 


432  PROTECTIVE  LEGISLATION. 

pauper  labor  of  Europe  to  compete  in  our  own  markets,  we 
must  remember  that  the  chief  effect  of  such  competition 
will  be  to  force  our  labor  into  lines  where  it  is  more  pro- 
ductive. We  shall  make  it  impossible  for  men  to  live  in 
some  lines ;  we  shall  make  it  more  profitable  to  divert 
their  work  to  other  lines. 

§  477.  It  is  sometimes  said  by  protectionists  that  they 
do  not  want  us  to  diminish  our  imports  as  a  whole ;  they 
want  us  to  make  all  the  things  we  can  and  use  our  money 
in  importing  things  we  cannot  get  otherwise.  But  the 
question  of  ability  or  inability  to  make  a  thing  is  one  of 
degree.  If  we  try  to  make  things  for  which  we  have 
only  moderate  advantages,  and  in  so  doing  divert  labor 
and  capital  from  those  where  we  have  extraordinary  ones, 
we  do  not,  in  general,  make  money  ;  we  lose  more  than 
we  gain.  The  attempt  to  do  everything  ourselves  for  the 
sake  of  shutting  out  the  competition  of  pauper  labor  from 
abroad  is  in  its  results  not  unlike  the  attempt  of  a  surgeon 
to  make  money  by  shovelling  his  own  snow.  The  surgeon 
has  a  physical  and  mental  education  which  enables  him 
to  shovel  snow  with  less  expenditure  of  time  and  force 
than  the  laborer  who  offers  to  do  it  for  him.  Why,  then, 
does  he  hire  the  laborer  instead  of  doing  the  work  him- 
self ?  Why  does  he  say  that  he  cannot  afford  to  shovel 
his  own  snow  ?  Because  there  is  a  line  of  industry  open 
to  him  in  which  he  can  make  ten  dollars  an  hour,  and  he 
cannot  afford  to  waste  his  strength  in  competing  with 
men  who  earn  one  dollar  an  hour.  The  diversion  of  force 
to  the  unprofitable  employment  is  a  loss  instead  of  a  gain. 
If  an  ordinance  were  passed  compelling  every  surgeon  to 
shovel  his  own  snow,  he  would  gain  one  dollar  and  lose 
ten.  He  would  avoid  the  competition  of  pauper  labor, 
but  at  the  expense  of  a  large  reduction  in  his  aggregate 
income.  His  high  rate  of  pay  is  the  result,  not  of  legisla- 
tive restrictions,  but  of  a  difference  in  industrial  efficiency; 
an  advantage  which  he  may  forego  if  he  chooses,  for  tjie 


EXHAUSTION  OF   THE   SOIL.  433 

sake  of  diversifying  his  employment,  but  at  an  economic 
loss  rather  than  an  economic  gain. 

§  478.  In  the  second  group  of  arguments  for  a  protec- 
tive tariff,  it  is  frankly  admitted  that  the  so-called  creation 
of  new  industries  is  really  a  diversion  of  labor  and  capital 
from  one  employment  to  another ;  but  it  is  maintained 
that  the  indirect  advantages  which  may  accrue  from  such 
a  policy  are  great  enough  to  warrant  any  temporary  sac- 
rifice which  it  involves.  Its  advocates  urge,  in  the  first 
place,  that  the  apparent  profit  in  the  exercise  of  unpro- 
tected industries  is  often  not  a  real  or  permanent  one. 
An  industry  may  apparently  be  very  profitable,  when 
private  individuals  are  being  allowed  to  appropriate  the 
natural  resources  of  the  country  and  to  weaken  it  by 
sending  those  resources  abroad  for  their  own  pecuniary 
advantage.  This  is  true  conspicuously  of  mining  and 
timber  cutting ;  it  is  in  somewhat  less  degree  true  of 
food  production.  Systems  of  agriculture  under  which 
the  owners  seek  to  get  all  that  they  can  out  of  virgin  soil, 
exporting  a  large  product  for  a  few  years  without  making 
proper  returns  to  the  land  in  the  form  of  manure,  may 
result  in  impoverishing  the  home  country  for  the  benefit 
of  foreign  consumers.  If  by  a  well  devised  tariff  a  part  of 
the  labor  and  capital  thus  used  in  agriculture  is  diverted 
to  manufacturing,  the  advocates  of  protection  say  that 
it  will  result  in  supporting  more  people  at  home  with 
less  exhaustion  of  the  soil,  and  on  a  basis  which,  though 
perhaps  temporarily  less  remunerative,  will  be  far  more 
profitable  in  the  long  run. 

They  urge  that  under  these  circumstances  the  tariff 
may  conceivably  give  increased  employment  to  labor 
from  the  outset.  If  a  country  is  engaged  in  agriculture, 
and  in  that  alone,  the  differences  in  the  character  of  the 
land  used  will  show  themselves  in  the  form  of  economic 
rent.    This  is  a  surplus  which  goes  to  the  landowners  and 

is  not  necessarily  distributed  among  the  laborers  at  all  •, 

28 


434  PROTECTIVE  LEGISLATION. 

especially  if  the  landowner  uses  his  income  to  import 
foreign  articles  of  luxury.  If  a  change  in  tariff  policy 
causes  less  agricultural  land  to  be  used  and  makes  indus- 
try more  diversified,  there  will  be  smaller  differences 
which  can  be  appropriated  as  rent.  Even  where  the 
momentary  efficiency  of  labor  in  earning  a  return  for 
its  employer  is  slightly  diminished,  it  is  quite  conceiv- 
able that  the  amount  actually  distributed  to  labor  may 
increase,  and  the  social  condition  of  the  community  be 
benefited  rather  than  injured. 

§  479.  If  this  is  conceivable  as  a  momentary  result,  it  is 
still  more  possible  in  the  long  run.  The  introduction  of  a 
new  industry  is  attended  with  great  difficulties,  which 
make  its  returns  during  the  first  years  quite  uncertain.  A 
tariff  arranged  to  protect  an  infant  industry  may  be  suf- 
ficient to  overcome  this  initial  uncertainty  which  makes 
it  impossible  for  individuals  to  start  such  an  enterprise ; 
and  may  after  a  brief  time  provide  the  country  not  only 
with  profitable  investments  of  capital  in  diversified  lines, 
but  with  useful  employment  for  laborers  whose  skill  would 
otherwise  have  remained  undeveloped. 

Such  investments,  it  is  said,  give  a  chance  for  the  em- 
ployment of  high-grade  labor,  which  would  otherwise  be 
compelled  to  accept  what  it  could  earn  in  lower  grades  of 
work  where  its  special  powers  would  be  less  perfectly 
utilized.  If  a  country  like  England  has  special  industrial 
advantages  in  the  way  of  established  connections  and 
large  capital,  it  may  force  other  nations  to  engage  in  less 
complicated  forms  of  labor  which  do  not  properly  utilize 
their  more  intelligent  members.  This  argument,  which  is 
strongly  urged  by  writers  like  List  orGunton,  is  the  oppo- 
site of  the  pauper  labor  argument.  In  this  view,  a  country 
needs  protection,  not  from  the  weakest  laborers  of  other 
countries,  who  would  crowd  its  own  citizens  up  into 
higher  lines,  but  from  the  strongest  laborers  of  other 
countries,  who  would  crowd  them  down  into  lower  one^. 


DANGER   OF  MISTAKES.  435 

§  480.  On  the  theoretical  merits  of  this  argument  for 
protection,  it  is  difficult  and  unnecessary  to  pronounce  a 
definite  judgment.  If  we  could  assume  that  the  legisla- 
ture would  be  wise  and  incorruptible,  we  might  hope  that  it 
could  frame  a  tariff  which  would  be  of  positive  benefit  to 
the  community  ;  and  it  is  altogether  probable  that  it  could 
devise  one  which  would  produce  more  good  and  less  evil 
than  any  system  of  national  taxation  which  is  now  in  use. 
But  in  actual  practice  we  do  not  have  to  deal  with 
an  all-wise  and  incorruptible  legislature.  The  chance 
for  mistakes  in  the  adjustment  of  industrial  burdens, 
whether  made  in  good  faith  or  otherwise,  is  extremely 
great.  The  legislature  sees  the  new  industries  which  are 
developed  ;  it  fails  to  see  the  old  ones  which  are  handi- 
capped. It  may  produce  unforeseen  losses  which  out- 
weigh the  expected  gains.  Our  increase  of  manufacturing 
in  the  years  succeeding  the  Civil  War  is  heralded  as 
a  result  of  a  high  tariff,  by  many  who  overlook  the 
effects  of  that  tariff  as  manifested  in  the  accompanying 
diminution  in  the  ocean  marine  and  ocean  shipbuilding 
industries. 

§  481.  The  apparent  prosperity  which  often  attends  the 
first  operation  of  a  protective  tariff  increases  the  proba- 
bility of  these  mistakes.  The  policy  of  shutting  out  foreign 
goods  means  that  the  protected  country  duplicates  the 
plant  by  which  they  were  made.  The  persons  who  were 
saving  money  have,  for  the  time  being,  a  profitable 
method  of  utilizing  their  surplus — and,  incidentally,  of 
damaging  the  foreigner  by  so  doing.  But  after  a  short 
time  this  special  chance  for  investment  ceases.  The 
laborers  employed  in  making  machinery  are  thrown  out 
of  work.  The  whole  industrial  world  suffers  from  the 
effects  of  a  policy  which  has  duplicated  means  of  produc- 
tion and  restricted  facilities  of  exchange. 

§  482.  Far  from  preventing  exhaustion  of  the  soil,  actual 
tariff  legislation  is  apt  to  stimulate  it.    We  have  for  many 


436  PROTECTIVE  LEGISLATION. 

years  had  a  tariff  on  copper  not  justified  by  any  difference 
in  its  cost  of  production — for  no  mines  in  the  world  can 
produce  so  cheaply  as  those  of  the  Lake  Superior  region 
— but  acting  as  a  bonus  on  the  unnatural  extension  of 
mining  operations.  American  copper  has  habitually  been 
sold  in  London  in  competition  with  foreign  copper,  at  a 
price  less  than  was  paid  by  American  consumers  at  home. 
We  have  put  a  positive  premium  on  the  exhaustion  of 
American  mines  for  the  benefit  of  the  foreign  consumer. 
Equally  conspicuous  is  the  case  of  lumber.  Without  any 
good  pretext  in  connection  with  the  necessity  of  paying 
high  wages  to  American  labor — for  the  labor  that  is 
employed  in  the  lumber  business  is  very  largely  com- 
posed of  Canadians  who  come  to  this  country  temporarily 
and  return  to  their  homes  at  the  end  of  a  season — we  have 
exhausted  our  northern  forests  at  a  rate  which  has  proved 
dangerous,  not  merely  to  the  resources  of  the  country  as 
timber  land,  but  to  the  rainfall  and  other  conditions  con- 
nected with  public  health. 

§  483.  Under  these  circumstances,  the  argument  about 
increasing  the  share  of  the  national  income  that  goes  to 
the  laborer  and  diminishing  the  proportion  that  goes  to 
the  landowner  has  no  practical  application.  A  duty  like 
that  which  was  imposed  on  copper  shows  its  results,  not  in 
the  increased  proportion  of  wages  paid  in  the  copper 
industry,  but  in  the  very  high  value  of  the  shares  of  well 
situated  copper  mines.  A  tariff  which  is  accurately  ad- 
justed to  counterbalance  any  difference  in  labor  cost  in 
two  countries  may  have  the  theoretical  effect  of  increasing 
the  laborer's  share  at  the  expense  of  the  landowner's ;  a 
tariff  rate  higher  than  this  is  likely  to  have  the  opposite 
effect.  The  manufacturers  in  protected  lines  of  industry 
always  protest  against  public  attempts  to  ascertain  their 
labor  cost  per  unit  of  product.  This  protest  creates  a 
presumption  that  the  tariff  is  higher  than  can  be  justified 
on  grounds  of  protection  to  labor  alone. 


DELA  V  IN  REDUCING  DUTIES.  437 

§  484.  Protection  to  infant  induetries  has  unquestion- 
ably proved  successful  in  certain  cases.  But  it  is  open  to 
doubt  whether  the  number  of  instances  of  success  has 
been  suflficient  to  justify  the  expense  involved.  The 
period  of  industrial  infancy,  and  the  taxation  connected 
with  it,  almost  always  continues  longer  than  was  at  first 
anticipated.  Very  few  industries  have  been  in  a  position 
to  submit  to  a  removal  of  a  protective  tariff  within  the 
time  originally  contemplated.  In  many  the  rate  of  pro- 
tection has  tended  to  increase  rather  than  to  diminish.  If 
a  duty  is  "  specific  "  (§  507),  i.  e.  based  on  the  quantity  of 
a  product  imported  rather  than  on  its  value,  the  cheapen- 
ing of  the  protected  article  through  new  processes  of 
manufacture  makes  the  rate  of  protection  constantly  in- 
crease. Even  where  successive  tariff  bills  reduce  the 
specific  duty  per  yard  or  per  pound,  we  do  not  gener- 
ally find  any  continuous  reduction  in  the  ratio  between 
the  duty  levied  and  the  value  of  the  article  at  the  time 
of  passage  of  the  different  acts.  The  steel  rail  industry 
of  the  United  States  is  often  cited  as  an  instance  of  suc- 
cessful protection  and  falling  tariff  rates ;  but  the  actual 
percentage  of  duty  levied  has  on  the  whole  increased. 
The  tariff  rate  per  ton  has  fallen  ;  but  the  price  of  rails 
has  fallen  still  faster.  Nor  has  this  diminution  in  price 
been  the  result,  as  some  persons  would  have  us  believe, 
of  the  development  of  industry  in  the  United  States 
under  the  tariff  itself.  The  prices  have  been  habitually 
much  lower  in  England  than  in  the  United  States  ;  and 
in  countries  which  manufacture  no  rails  of  their  own  they 
have  been  quite  as  low  as  in  England.  What  is  claimed 
as  an  effect  of  the  protective  tariff  in  cheapening  prices 
is  usually  only  the  natural  result  of  modern  improve- 
ments in  the  arts,  which  we  should  have  enjoyed  quite 
as  fully  without  the  tariff  as  with  it.' 

'  The  only  convincing  proof  that  protection  has  ceased  to  be  a  burden 
upon  the  consumer  of  any  particular  article  (in  other  words,  that  an  industry 


438  PROTECTIVE  LEGISLATION. 

%  485.  Advocates  of  protection  to  infant  industries  often 
make  the  mistake  of  assuming  that  the  foreigner  is  a  single 
person  who  can  shift  prices  up  and  down  at  will ;  that 
he  will  charge  high  prices  for  articles  which  the  home 
producers  do  not  make,  but  accept  much  lower  ones 
when  the  development  of  a  protected  industry  has  made 
a  nation  independent  of  his  power.  But  the  competi- 
tion of  one  foreigner  with  another  prevents  extortion- 
ate rates  and  arbitrary  shifting  of  prices,  whether  there  be 
any  home  production  or  not.  Foreign  trade  is  the  hardest 
field  in  which  to  exact  monopoly  prices,  because  it  is  open 
to  competition  from  the  whole  industrial  world.  The 
home  producer  is  on  the  whole  far  more  likely  to  make 
arbitrary  prices  than  the  foreigner,  because  the  difficulty 
of  forming  a  pool  which  includes  all  the  capital  engaged 
in  a  given  line  of  business  in  any  one  country  is  far  less 
than  the  difficulty  of  doing  the  same  thing  for  the  whole 
world.  This  point  was  illustrated  by  the  history  of  the 
steel  rail  traffic,  where  a  strong  combination  was  formed 
that  for  ten  years  succeeded  in  keeping  up  the  price  of 
steel  rails  in  those  countries  which  produced  them.  Dur- 
ing a  large  part  of  this  period  Italy,  which  produced  no 
rails,'  obtained  its  supplies  from  Germany,  at  rates  thirty 
per  cent  lower  than  those  which  were  exacted  from 
German  purchasers. 

§  486.  Any  good  effect  of  a  tariff  in  promoting  the  de- 
velopment of  higher  grades  of  productive  industry  is  off- 
set by  its  bad  effect  in  retarding  the  development  of  varied 
consumption.  It  is  a  matter  of  prime  importance  for  the 
community  in  general,  and  the  laborers  in  particular,  to 
have  cheap  goods  placed  within  their  reach.  The  educa- 
tional effect  of  cheapness  in  increasing  consumption  and 
diversifying  the  enjoyments  of  a  community  is  very  great. 
A  tariff  which  temporarily  enhances  prices  for  the  sake  of 

has  outgrown  the  stage  of  infancy)  is  furnished  by  a  readiness  to  have  the 
tariff  removed. 


POLITICAL   DANGERS.  439 

indirect  effects  on  producers  is  liable  to  have  an  adverse 
effect  on  consumers  which  outweighs  the  possible  good 
that  it  might  otherwise  afford.' 

§  487.  A  tariff  to  protect  infant  industry,  being  avow- 
edly temporary  in  its  nature,  is  liable  to  be  removed ;  and 
the  doubt  as  to  the  time  of  this  removal  constitutes  a 
serious  economic  burden.  The  great  majority  of  business 
men  agree  that  the  worst  evil  in  a  tariff  is  uncertainty ; 
that  industry  will  adjust  itself  to  almost  any  schedule  of 
duties,  high  or  low,  if  it  is  continued  long  enough,  but 
that  the  possibility  of  a  change  in  the  future  has  a  para- 
lyzing effect  on  trade  of  every  kind.  Any  tariff  which  is 
temporary  in  its  nature  and  variable  in  its  amount  is  apt 
to  produce  the  spasmodic  demand  for  labor  and  irregular 
investment  of  capital  in  machinery,  whose  evils  have  been 
clearly  described  in  a  previous  chapter.  It  cannot  be 
expected  that  people  will  agree  as  to  the  time  when  an 
industry  should  be  left  to  stand  alone.  If  there  has  been 
an  over-investment  of  capital  in  any  industry  it  will  suffer 
severely  when  finally  exposed  to  foreign  competition. 
The  more  completely  the  height  of  a  tariff  has  been  left 
to  the  discretion  of  the  manufacturers,  the  greater  is  the 
danger  of  such  over-investment,  and  of  organized  political 
opposition  to  the  removal  of  the  duty  when  the  pretext 
for  it  has  been  outgrown.  A  system  of  taxation  which 
is  arranged  with  a  view  to  the  needs  of  particular  indus- 
tries, rather  than  those  of  the  treasury  department,  is 
liable  to  be  upset  by  a  change  of  party,  if  the  leaders  of 
the  new  legislature  are  not  in  touch  with  the  business 
men  in  industries  or  localities  which  have  enjoyed  protec- 
tion. Here  we  have  what  is  perhaps  the  most  serious 
evil  connected  with  the  protective  system.  It  makes  the 
success  or  failure  of  business  enterprise  depend  upon  the 

'  It  is  strange  that  Patten,  who  has  so  emphasized  the  importance  of 
diversified  consumption,  should  have  overlooked  this  point  in  his  very 
ingenious  arguments  on  the   "  Economic  Basis  of  Protection." 


440  PROTECTIVE  LEGISLATION. 

retention  of  a  particular  set  of  men  in  office.  Whether  it 
actually  produces  corruption  or  not,  it  furnishes  a  power- 
ful motive  for  subscription  to  campaign  funds,  and  a 
temptation  to  corrupt  practices.  The  less  the  average 
congressman  understands  the  needs  of  business,  the 
greater  is  the  danger  that  his  vote  may  be  shaped  by 
the  results  of  improper  influences,  even  when  his  own 
personal  character  is  above  suspicion.  With  legislatures 
as  they  are  actually  constituted  and  elections  as  they 
are  actually  managed,  the  danger  to  popular  government 
as  a  whole,  arising  from  this  source,  outweighs  the  good 
which  can  be  expected  to  result  from  the  application  of 
protection  for  the  sake  of  diversifying  industry.  If  the 
business  men  of  the  country  were  unenterprising  and 
short-sighted,  while  its  statesmen  were  able  to  take  a 
wider  and  clearer  view  of  the  future,  many  of  these  the- 
oretical arguments  for  protection  would  deserve  careful 
consideration.  With  matters  as  they  stand,  it  seems 
much  the  safer  economic  policy  to  adjust  the  tariff  for 
purposes  of  revenue. 

§  488.  The  third  group  of  arguments  for  protection  is 
based  on  military  necessity.  If  there  were  no  such  thing 
as  war,  and  all  countries  could  settle  their  disputes  ami- 
cably, many  protectionists  say  they  would  at  once  be- 
come free  traders  ;  but  as  long  as  there  is  a  possibility  of 
armed  conflict  which  may  exclude  a  nation  from  its  outside 
sources  of  supply,  they  believe  it  necessary  to  be  prepared 
for  such  an  emergency.  They  adduce  in  confirmation  of 
their  view  instances  like  the  American  Civil  War.  The 
North  had  already  established  manufactures ;  the  South 
had  to  improvise  them.  This  difference  had  a  great  effect 
on  the  issue  of  the  conflict.  Of  still  more  importance  in 
the  same  connection  was  the  disparity  between  the  naval 
forces  of  the  North  and  South.  The  North  had  a  reserve 
of  seamen  trained  in  her  merchant  marine,  and  was  able 
to  establish  an  effective  blockade,  which  Southern  steamejjs 

t 

4» 


NA  VIGA  TION  A  CTS.  44 1 

were  sometimes  able  to  elude  but  never  really  to  break. 
As  long  as  the  control  of  sea  power  exercises  such  decisive 
influence  on  the  results  of  warfare,  it  is  claimed  that  every 
nation  which  would  preserve  its  independence  must  main- 
tain not  only  diversified  industries  which  will  make  it 
independent  of  foreign  supplies,  but  an  effective  navy,  a 
merchant  marine,  and  a  shipbuilding  industry  by  which 
the  navy  can  be  rapidly  increased  in  an  emergency. 

So  far  as  this  argument  is  based  on  political  grounds 
rather  than  industrial  ones,  it  hardly  falls  within  the  pur- 
view of  an  economist  to  criticise  it ;  except  perhaps  by 
the  suggestion  that  a  very  small  part  of  the  proceeds  of  a 
revenue  tariff,  placed  directly  at  the  disposal  of  the  mili- 
tary authorities,  would  do  more  to  prepare  a  nation  for 
war  than  is  accomplished  by  a  protective  tariff.  But  the 
policy  of  protection  to  the  foreign  carryvig  trade  is  advo- 
cated for  its  results  in  the  commercial  rivalry  of  nations 
no  less  than  in  their  trials  of  military  strength  ;  and  no 
economic  discussion  of  the  subject  is  at  all  complete  un- 
less it  deals  with  these  claims. 

§  489.  Under  the  influence  of  the  mercantile  system  of 
political  economy,  the  leading  commercial  nations  tried.to 
protect  their  shipping  by  navigation  acts,  which  confined 
the  carrying  trade  between  any  two  powers  to  the  ships 
belonging  to  those  powers.  Thus  the  trade  between 
England  and  France  was  open-  to  English  and  French 
ships,  but  not  to  Dutch  ships.  The  application  of  these 
.laws  caused  great  inconvenience,  involving  the  ship- 
owners in  roundabout  voyages,  and  often  preventing 
merchants  from  forwarding  their  cargoes  as  quickly  and 
cheaply  as  they  might  otherwise  have  done.  Before  the 
middle  of  the  present  century,  these  laws  were  gradually 
done  away  with  ;  though  the  United  States  still  confines 
its  coasting  trade  to  its  own  vessels. 

All  direct  protection  being  thus  abandoned,  the  carry- 
ing trade  of  the  world  tended  to  fall  into  the  hands  of  the 


442  PROTECTIVE  LEGISLATION. 

nations  that  could  build  and  run  ships  most  cheaply. 
For  a  time,  England  and  the  United  States  were  closely 
matched  in  the  race.  As  long  as  ships  were  built  of  wood 
the  United  States  had  a  slight  advantage.  But  with  the 
substitution  of  iron  or  steel  for  wood  and  steam  for  sail, 
the  conditions  were  reversed  ;  and  a  protective  policy 
which  enhanced  the  cost  of  shipbuilding  materials  tended 
to  increase  the  disadvantage  under  which  American  ship- 
owners labored,  compelled  as  they  were  by  law  to  buy 
their  ships  at  home.  They  were  thus  handicapped  on 
either  side,  receiving  no  protection  against  foreign  com- 
petitors, and  being  compelled  to  buy  vessels  in  a  dearer 
market  in  case  they  wished  to  run  them  under  the  Ameri- 
can flag.  As  a  result  the  ocean  tonnage  of  America  fell 
rapidly  behind,  in  spite  of  the  increased  amount  of  goods 
to  be  carried  ;  and  England  became  the  unquestioned 
leader  in  the  world's  merchant  marine.  A  considerable 
amount  of  American  capital  is  invested  in  ships  sailing 
under  the  British  flag,  because  of  the  economy  which  is 
obtained  in  buying  ships  where  they  are  cheapest.  The 
requirement  that  American  ships  should  be  built  in  home 
yards,  which  was  intended  to  protect  the  American  ship- 
builders, only  resulted  in  driving  the  American  flag  from 
the  seas. 

§  490.  When  navigation  acts  were  abandoned,  recourse 
was  had  to  subsidies  as  a  means  of  encouraging  the  mer- 
chant marine.  It  was  inaugurated  by  Great  Britain, 
whose  widely  scattered  colonial  empire  made  it  necessary 
to  maintain  communication  between  the  different  ports 
by  the  quickest  possible  method,  and  to  utilize  steam  for 
this  purpose  at  the  earliest  possible  moment.  With  this 
end  in  view,  large  postal  contracts  were  made,  during  the 
years  from  1837  to  1840,  with  the  Peninsular  and  Orien- 
tal Line,  the  Cunard  Line,  and  the  Royal  Mail  to  the 
West  Indies.  The  system  of  profitable  mail  contracts  was 
gradually  extended  until  the  time  came  when  the  need 


SUBSIDIES   TO   SHIPPING.  443 

for  them  was  practically  outgrown.  The  United  States 
adopted  a  similar  policy  a  few  years  later  (1848),  but  prac- 
tically abandoned  it  just  before  the  Civil  War.  Since  1880 
there  has  been  a  tendency  on  the  part  of  other  nations  to 
extend  the  subsidy  system  more  widely,  and  to  make 
payments,  not  for  special  services  in  carriage  of  mails,  but 
for  the  much  less  definite  service  of  running  steamers 
under  the  National  f!ag.  France  has  gone  further  in  this 
matter  than  any  other  nation,  having  an  elaborate  system 
of  bounties  both  for  construction  and  navigation.  Italy 
has  adopted  somewhat  similar  methods.  Germany, 
Austria  and  (since  1891)  the  United  States,  pay  subsidies 
in  the  form  of  mail  compensation,  sometimes  under 
general  laws  and  sometimes  under  special  contracts — 
perhaps  the  most  important  of  the  latter  being  that  be- 
tween the  United  States  and  the  International  Navigation 
Company  for  a  transatlantic  service. 

These  subsidized  steamers  are  useful  in  providing  a 
reserve  in  case  of  war.  The  commercial  success  of  the 
policy  is  more  doubtful,  whether  we  look  at  its  effect  on 
the  profit  of  the  shipowners  or  upon  the  commerce  of  the 
nation.  French  experience  seems  to  indicate  that  the 
system  of  bounties,  by  calling  unnecessary  ships  into 
operation,  diminishes  the  regular  earnings  of  the  business 
to  a  degree  for  which  the  government  bounty  furnishes 
scant  compensation  ;  while  the  old  proverb  that  "  trade 
follows  the  flag  "  is  hardly  borne  out  by  recent  events. 
It  may  have  been  true  in  old  times  that  goods  went 
where  ships  most  desired  to  take  them  ;  but  with  modern 
facilities  of  communication,  the  owners  of  the  goods  make 
up  their  minds  where  they  want  them  to  go,  and  the 
ships  must  take  them  there  or  nowhere.  All  things  con- 
sidered, it  would  be  hard  to  show  any  commercial  gains 
from  subsidies  which  compensate  for  the  sums  spent  in 
this  way. 

§  491.  A  popular  form  of  the  military  argument  for 


444  PROTECTIVE  LEGISLATION. 

protection  rests  in  the  fact  that,  by  the  adoption  of  re- 
strictions upon  trade,  we  do  other  nations  injury.  We 
are  told  that  free  trade  would  be  all  very  well  if  every  na- 
tion adopted  it ;  but  as  long  as  other  people  are  imposing 
tariffs  against  our  goods,  we  must  be  prepared  to  strike 
back.  Those  who  hold  this  view  in  its  milder  shape  are 
content  to  regard  a  tariff  as  a  diplomatic  means  of  secur- 
ing mutual  concessions  {reciprocity) — sometimes  treating 
these  concession  as  steps  toward  a  general  policy  of  tariff 
reduction  the  world  over,  which  was  the  plan  pursued  by 
the  ministers  of  Napoleon  III. ;  sometimes  bargaining  for 
them  as  special  privileges  not  to  be  granted  to  the  world 
in  general,  which  is  the  idea  underlying  the  present  reci- 
procity treaties  of  the  United  States.  But  there  are  not 
a  few  who  go  farther  than  this  ;  who  regard  injury  to 
other  nations  as  gain  to  ourselves,  and  who  say  that  they 
advocate  a  high  tariff  for  the  United  States  because  Eng- 
land desires  to  have  a  low  tariff. 

§  492.  When  this  view  is  accepted,  a  policy  of  tariff 
warfare  follows  as  a  matter  of  course.  There  are  times 
when  it  seems  as  though  a  great  many  nations  were  car- 
ried away  with  this  spirit  of  commercial  hostility.  The 
years  since  1870  have  afforded  only  too  clear  an  illus- 
tration of  this  spirit.  But  they  certainly  have  not  been 
a  period  of  prosperity  for  the  nations  concerned  ;  and  it 
is  perhaps  safe  to  regard  the  policy  of  these  twenty-five 
years  as  a  set-back  in  the  general  current  of  economic 
events  rather  than  as  an  indication  of  the  course  of  that 
current.  If  we  look  at  any  long  period  of  time  we  find 
that  national  intercourse  and  friendliness  are  increasing 
rather  than  diminishing.  Increased  travel  and  cheap- 
ened transportation  bring  people  together  more  power- 
fully than  armies  or  custom  houses  can  keep  them  apart. 
The  legal  disabilities  of  foreigners  are  being  broken  down 
by  international  patent  right  and  international  copyright. 
The  world  is  on  the  whole  learning  that  strangers  are 


COLONIZATION.  445 

not  enemies  ;  and  that  even  in  dealings  between 
strangers,  each  party  is  helped  by  the  prosperity  of  the 
other.  It  is  undoubtedly  true  that  a  nation  can  hurt 
foreigners  by  its  tariff ;  but  there  is  not  one  whit  of  evi- 
dence to  show  that  it  helps  itself  individually  by  legis- 
lation devised  with  such  a  purpose,  and  every  reason  to 
believe  that  the  attitude  of  mutual  hostility  thus  engen- 
dered involves  evil,  commercially  and  politically,  to  all 
the  parties  concerned. 

§  493.  Colonization  as  a  measure  of  national  protection 
and  a  means  of  finding  profitable  employment  for  labor, 
has  had  more  importance  in  the  past  that  it  has  at  present. 
The  conspicuous  advantages  which  it  affords  are,  first,  an 
opportunity  of  employing  labor  on  new  land,  and  thus 
relieving  pressure  of  population  on  subsistence ;  second, 
a  means  of  diversifying  industry  by  taking  advantage 
of  different  climates  and  of  a  range  of  natural  resources 
not  likely  to  be  found  within  the  limits  of  a  single  com- 
pact territory.  The  older  advocates  of  colonization  lard 
great  stress  on  the  second  of  these  points.  The  English 
authorities  measured  the  value  of  a  colony  by  its  power 
of  producing  things  which  England  must  otherwise  im- 
port. Virginia  was  highly  prized  because  it  could  furnish 
tobacco  ;  New  England  was  rated  lightly,  because  its  pro- 
ducts were  so  nearly  the  same  as  those  of  the  mother 
country.  With  the  downfall  of  the  mercantile  system, 
this  argument  has  been  less  frequently  urged.  It  is  seen 
that  the  prosperity  of  a  colony  and  its  utility  to  the 
mother  country  are  due  to  the  general  efficiency  of  its 
labor  rather  than  to  the  particular  form  in  which  that 
labor  is  embodied.  Colonies  are  now  valued  by  states- 
men as  means  of  relieving  the  country  of  its  surplus 
population  without  weakening  it  to  the  degree  which  is 
inevitable  when  emigrants  seek  refuge  under  a  foreign 
flag.  But  even  when  we  look  at  them  in  this  light, 
colonies  are  by  no  means  a  source  of  unmixed  strength*. 


44^  PROTECTIVE  LEGISLATION. 

As  long  as  they  remain  weak,  they  are  apt  to  involve 
expense  to  the  home  country ;  when  they  grow  strong 
they  are  independent  enough  to  repel  the  suggestion  that 
they  should  repay  the  bounty  of  earlier  days,  and  to  meet 
any  attempt  to  force  such  repayment  by  a  declaration  of 
independence.  It  is  on  grounds  of  political  rather  than 
of  commercial  or  fiscal  advantage  that  the  modern  states- 
man must  rest  his  defense  of  a  policy  of  colonization. 


CHAPTER  XIV. 

GOVERNMENT   REVENUE. 

Its  Different  Forms — Principles  of  Taxation — Certainty  the  Primary  Object 
— Incidence  of  Taxation — Direct  and  Indirect  Taxes — Property  and 
Income  Taxes — Progressive  Taxation — The  Single  Tax^— Public  Debts. 

For  American  and  English  readers,  the  most  available  general  work  on 
finance  is  probably  C.  F.  Bastable's  "  Public  Finance."  2d  ed.  London, 
1895.  The  able  writings  of  Wells  and  of  Seligman  are  unfortunately  some- 
what fragmentary. 

The  French  and  German  literature  on  the  subject  is  much  fuller.  It  is 
enough  to  refer  to  the  writings  of  De  Parieu  and  of  Leroy-Beaulieu,  or  to 
those  of  Cohn  (translated  by  Veblen,  Chicago,  1895),  of  Wagner,  and  of 
the  contributors  to  the  second  volume  of  Schoenberg's  "  Handbuch." 

§  494.  The  ordinary  sources  of  revenue  of  modern 
governments  divide  themselves  into  three  groups :  i. 
Prices.     2.  Fees  and  Assessments.     3.  Taxes. 

A  price  is  a  charge  for  special  services  which  people  are 
not  compelled  to  accept  unless  they  choose.  A  fee  or 
assessment  is  a  charge  for  special  services  which  people 
are  compelled  to  accept  whether  they  will  or  no.  A  tax 
is  not  based  on  special  services,  but  is  a  forced  contribu- 
tion to  the  general  expenses  of  the  government. 

§  495.  When  the  government  revenue  takes  the  form 
of  2^  price  it  is  collected  by  processes  like  those  of  private 
business.  But  the  range  of  prices  which  the  government 
can  charge  is  far  wider  than  that  which  is  open  to  a  pri- 
vate individual  or  corporation.  It  may  use  its  position  of 
vantage  to  compel  the  payment  of  a  higher  price  than  an 
individual  can  charge,  as  in  the  case  of  the  tobacco  and 

447 


448  GOVERNMENT  REVENUE. 

salt  monopolies  of  Continental  Europe,  or  the  rates  of 
letter  postage  in  the  United  States,  Or,  on  the  other 
hand,  it  may  make  use  of  its  varied  fiscal  resources  to 
charge  a  much  lower  price  than  an  individual  would  be 
likely  to  do  or  could  do  without  running  into  bankruptcy. 
This  is  illustrated  by  the  sales  of  public  land  in  the  United 
States,  or  by  the  passenger  rates  of  the  various  European 
state  railroads.  Most  of  the  arguments  for  government 
ownership  of  industrial  enterprises  proceed  on  the  assump- 
tion that  very  low  prices  will  result  rather  than  very  high 
ones — an  assumption  which  is  not  always  borne  out  by 
the  facts.'  When  the  government  charges  more  than  indi- 
viduals could  do,  the  payment  exacted  is  known  as  a 
monopoly  price,  and  is  treated  by  most  writers  on  finance 
as  a  tax  on  the  consumer.  When  it  charges  approxi- 
mately the  same  rate  that  a  private  individual  would  do, 
whether  it  be  under  the  stress  of  actual  competition  or 
not,  the  payment  is  known  as  a  quasi-private  price. 
When  it  charges  less  than  a  private  individual  would  do, 
the  payment  is  called  a  public  price. 

§  496.  The  payment  of  a  price  to  the  government  is  to 
a  certain  extent  voluntary,  since  the  purchaser  has  the 
option  of  avoiding  it  by  going  without  the  service  ren- 
dered. When  there  is  no  such  option,  and  the  payments, 
though  based  on  special  services  rendered,  are  collected 
by  processes  different  from  those  which  an  individual 
could  adopt,  it  is  called  an  assessment  or  2.  fee.  The  chief 
difference  between  the  two  things  is  that  an  assessment  is 
levied  once  for  all,  to  meet  some  extraordinary  expense, 
while  fees  are  charged  for  services  which  are  constantly 
recurring  in  the  ordinary  course  of  relations  between  a  gov- 
ernment and  its  subjects.  Assessments  are  levied  on  prop- 
erty rather  than  on  persons,  and  there  is  usually  a  more 
careful  attempt  to  make  the  price  conform  to  benefits 
rendered  than  can  possibly  be  carried  out  in  the  case  of 
'  Compare  §  446. 


TAX  A  TION.  449 

fees.  A  sewer  is  built  by  assessments ;  lighthouse  and 
hospital  service  are  supported  by  fees.  It  is  the  theory  of 
some  writers  that  fees  are  based  upon  cost  of  service.  But 
license  fees  (which  perhaps  should  be  regarded  as  taxes) 
are  far  in  excess  of  specific  cost  of  service — indeed  there 
is  often  a  conspicuous  absence  of  positive  service  ren- 
dered ;  while  judicial  fees  are  in  many  cases  far  below 
the  cost  of  maintaining  the  services  which  they  help  to 
support. 

§  497.  Whatever  part  of  the  current  expenses  of  gov- 
ernment cannot  be  covered  by  prices,  fees  or  assessments 
must  in  general  be  met  by  taxation^ 

Taxation  is  a  system  of  forced  contribution  to  meet  the 
general  expenses  of  the  government,  whether  national 
or  local.  Taxes  are  distinguished  from  fees  and  assess- 
ments in  being  a  contribution  for  general  services  instead 
of  a  more  or  less  adequate  return  for  special  services. 
They  are  distinguished  from  fines  and  confiscations  in 
being  part  of  a  regular  system,  publicly  arranged  as  a 
means  of  meeting  the  deficit  which  the  government  ac- 
count or  budget  would  otherwise  show. 

§  498.  This  idea  of  systematic  taxation  has  been  a 
matter  of  gradual  development.  In  the  earlier  stages  of 
political  society  the  government  tried  to  get  as  much  as 

'  Seligman,  in  his  extremely  interesting  treatment  of  the  subject,  prefers 
a  classification  of  the  public  revenues  based,  not  on  the  methods  of  collec- 
tion, but  on  the  comparative  importance  of  the  public  and  private  purpose 
in  the  service  rendered  by  the  government.  A  quasi-private  price  is  charged 
when  the  public  purpose  is  of  subordinate  importance,  and  the  special  bene- 
fit to  the  individual  is  the  dominant  consideration.  A  fee  or  a  tax  is 
levied  when  the  public  purpose  becomes  the  controlling  or  exclusive 
consideration  of  the  government  in  rendering  the  service  while  the  benefit 
to  the  individual  assumes  correspondingly  less  importance.  But  it  will 
be  found  on  examination  that  Seligman's  classification  nearly  coincides 
with  the  one  in  the  text.  For  if  a  charge  is  fixed  on  a  basis  of  special 
benefits  rendered,  it  is  safe  to  leave  it  to  individuals  to  decide  whether  they 
care  enough  for  the  service  to  pay  for  it ;  while  if  the  public  purpose  be- 
comes the  dominant  or  exclusive  consideration,  the  basis  and  method  of 
collection  must  be  correspondingly  modified. 


450  GOVERNMENT  REVENUE. 

it  could,  without  regard  to  system,  while  the  subjects 
were  trying  to  pay  as  little  as  they  could.  As  late  as  the 
seventeenth  century  the  great  French  financier,  Colbert, 
defined  taxation  as  "the  art  of  so  plucking  the  goose  as 
to  secure  the  largest  amount  of  feathers  with  the  least 
amount  of  squealing."  It  is  an  unfortunate  truth  that  we 
have  not  wholly  outgrown  the  stage  of  political  life  which 
gave  this  definition  its  force.  But  as  popular  government 
has  made  progress, — or,  more  accurately,  as  we  have 
gradually  come  to  rely  on  the  consent  of  the  people  to 
give  force  to  legal  enactments — we  have  learned  to  regard 
taxes  as  a  self-levied  contribution  which  each  man  pays 
according  to  his  abihty.  Though  this  ideal  is  as  yet  very 
far  from  being  realized  in  practice,  it  has  become  a  funda- 
mental doctrine  of  political  justice  among  the  great  mass 
of  civihzed  men.  In  fact,  the  positiveness  with  which 
this  ideal  is  asserted,  coupled  with  some  uncertainty  as  to 
the  form  in  which  it  would  best  be  realized,  and  with 
widespread  ignorance  as  to  the  means  by  which  it  can  be 
best  attained,  forms  at  present  an  obstacle  rather  than  an 
aid  to  measures  which  would  really  make  taxation  more 
equitable. 

§  499.  Adam  Smith,  in  a  passage  frequently  quoted,' 
lays  down  four  criteria  of  a  good  tax  system :  equity, 
certainty,  convenience  of  time  of  payment,  and  avoidance 
of  unnecessary  cost  of  collection,  direct  or  indirect.  If  all 
these  things  can  be  combined,  the  tax  is  obviously  a  good 
one.  But  what  if  they  cannot  all  be  combined  ?  What 
if  the  first  two  requirements  (which  are  the  most  funda- 
mental general  principles,  the  third  and  fourth  being 
largely  matters  of  administrative  detail)  be  found  to  con- 
flict with  one  another  ?  What  shall  we  do  if  the  pursuit 
of  equity  demands  sacrifice  of  certainty,  and  if  all  the 
methods  of  taxation  which  promise  a  sure  return  seem  to 
leave  some  men  untouched  who  can  best  afford  to  pay? 

'  Wealth  of  Nations,  Book  V.,  chapter  ii.,  part  ii. 


ADAM  SMITH'S  PRINCIPLES.  451 

By  placing  equity  first,  Smith  gives  countenance  to  the 
popular  view  that  we  should  make  this  not  only  our  ideal 
of  taxation  but  our  guiding  principle  in  framing  tax  laws. 
As  an  ideal  it  is  undoubtedly  right ;  as  a  guiding  princi- 
ple, it  will  be  found  to  defeat  the  realization  of  that  ideal. 

§  500.  It  should  be  said  in  justification  of  Smith,  that 
the  distinction  between  ideals  and  guiding  principles  in 
taxation,  which  has  since  become  so  conspicuous,  was  in 
his  day  only  just  beginning  to  take  shape.  In  ancient 
times  certainty  and  equity  went  hand  in  hand.  The  men 
who  held  property  and  enjoyed  income  had  this  prop- 
erty and  income  in  forms  which  rendered  it  easy  of  as- 
sessment. Their  wealth  consisted  chiefly  of  real  estate. 
Personal  property  was  small  in  amount,  and  consisted 
largely  of  visible  and  tangible  objects  like  plate  or  jewels, 
kept  for  display  rather  than  for  income.  The  persons 
who  could  best  pay  taxes  held  the  property  whose  value 
could  be  ascertained.  The  attempts  to  levy  taxes  on 
other  people,  though  frequently  made,  were  at  once  in- 
effective and  unjust.  But  from  the  time  of  Adam  Smith 
downward  there  has  been  an  increasing  divergente  from 
this  state  of  things.  The  persons  who  are  best  able  to 
pay  taxes  are  not  now  so  situated  that  the  assessors  can 
ascertain  the  exact  measure  of  their  ability.  Invisible 
forms  of  personal  property,  like  stocks  or  notes,  have 
assumed  a  dominant  importance.  The  attempt  to  secure 
equal  contributions  by  a  general  income  tax,  or  a  general 
property  tax,  may  result  in  exempting  the  dishonest  and 
burdening  the  honest,  in  making  a  tax  system  whose  bur- 
dens are  wholly  out  of  proportion  to  the  financial  results. 
Under  these  conditions  the  tax  legislator  now  has  to 
choose  between  making  equality  or  certainty  his  primary 
end,  rather  than  to  keep  both  in  view  as  coordinate  aims. 

In  the  light  of  experience  in  modern  industrial  com- 
munities there  can  scarcely  be  any  doubt  as  to  the 
proper  choice.     Certainty  is  the  fundamentally  important 


452  GOVERNMENT  REVENUE. 

object,  without  which  all  attempts  at  equality  prove  illu- 
sory.' With  an  uncertain  tax  no  systematic  improvement 
can  be  hoped  for.  With  a  certain  tax  many  evils  which 
exist  at  the  outset  tend  to  diminish  as  time  goes  on. 

§  501.  Uncertainty  may  result  either  from  failure  to 
discover  the  objects  which  should  be  taxed ;  or  from 
doubt  as  to  their  value  ;  or  from  the  possibility  of  col- 
lusion between  the  assessor  and  the  person  who  should 
pay  the  tax  by  which  consent  is  given  to  an  unduly  low 
valuation. 

§  502.  To  avoid  the  first  evil,  taxes  should  be  levied, 
as  far  as  possible,  upon  visible  and  tangible  objects.  In 
general,  things  should  be  assessed,  rather  than  persons. 
The  attempt  to  rely  on  personal  disclosure  as  a  means  of 
discovering  taxable  property  results  in  discrimination  of 
the  worst  character.  The  property  or  income  of  widows 
and  orphans,  which  is  in  the  hands  of  trustees  whose 
reports  are  matters  of  public  knowledge,  is  taxed  at  its 
full  value ;  so  is  that  of  a  few  exceptionally  conscientious 
men.  The  majority  of  men  make  some  return  of  taxable 
property,  sufficient  to  satisfy  their  consciences  ;  but  they 
interpret  all  doubtful  points  in  their  own  favor,  so  as  to 
make  as  few  returns  as  possible.  They  take  the  law  into 
their  own  hands  ;  and,  as  an  English  essayist  has  said,  the 
law  is  such  a  fragile  thing  that  when  men  take  it  into 

'  If  people  would  carry  out  to  its  logical  conclusion  the  modern  theory 
that  taxes  are  a  self-imposed  burden,  we  might  make  equity  our  primary  ob- 
ject as  well  as  our  ultimate  goal.  Where  public  sentiment  insists  that  peo- 
ple shall  make  correct  tax  returns,  and  treats  laxity  in  this  respect  as  a 
dereliction  of  public  duty,  the  tax  legislator  has  a  comparatively  free  hand. 
There  are  certain  communities  where  this  sentiment  is  so  strong  that  the 
principal  of  self  assessment  can  be  safely  adopted,  with  the  knowledge  that 
crooked  tax  returns  will  be  as  severely  condemned  by  the  individual  con- 
science as  crooked  voting.  But  with  the  increasing  margin  of  doubt  as  to 
what  constitutes  taxable  income  the  difficulty  of  relying  on  such  sentiment 
becomes  greater  ;  and  in  the  absence  of  such  a  controlling  motive  no  tax 
law  can  be  made  effective,  unless  framed  with  the  immediate  purpose  of 
preventing  evasion.  ^ 

t 


MEANS  OF  ENSURING  CERTAINTY.  453 

their  own  hands  it  is  sure  to  get  broken.  Finally,  there 
is  a  considerable  class  of  men  who  have  no  conscience  at 
all  in  the  matter,  and  who,  in  safe  reliance  on  the  cer- 
tainty that  their  property  will  remain  undiscovered,  escape 
taxation  on  everything  which  the  law  hopes  to  discover 
by  their  declarations. 

We  cannot  rely  on  the  courts  for  much  help  in  cor- 
recting this  injustice.  They  feel  obliged  to  assume  that 
any  law  will  be  obeyed,  even  when  it  is  notorious  that 
such  is  not  the  case.  They  can  only  consider  theoretical 
violations  of  equity  ;  they  leave  to  the  legislator  the 
avoidance  of  practical  ones. 

Nor  is  this  an  evil  that  tends  to  correct  itself  by  time. 
The  success  of  the  bad  men  in  escaping  taxation  and  the 
impunity  with  which  they  defy  the  law,  lowers  the  public 
conscience  year  by  year.  When  we  have  a  tax  law  which 
discriminates  against  honesty,  the  honesty  and  the  law 
both  suffer  in  about  equal  measure, 

§  503.  Of  the  visible  and  tangible  sources  of  taxation, 
real  estate  is  probably  the  most  important.  It  can  always 
be  seen  ;  it  can  never  run  away.  In  order  to  be  sure  of 
taxing  its  owners,  it  is  only  necessary  to  apply  the  rule 
of  making  no  deductions  on  account  of  debt.  Mortgaged 
real  estate  should  be  assessed  at  its  full  value.  This  may 
seem  to  bear  hard  on  the  debtor  ;  but  it  is  really  far  more 
equitable  than  the  system  of  deductions.  If  such  deduc- 
tions are  allowed,  a  large  part  of  the  money  loaned  on  real 
estate  escapes  taxation  altogether ;  while  undue  burdens 
are  put,  first,  on  the  holder  of  unmortgaged  real  estate 
who  has  to  pay  a  higher  tax  rate  on  account  of  the  deduc- 
tions made  from  the  grand  list,  and,  second,  on  the  honest 
minority  of  lenders '  who  pay  a  high  tax  rate  on  their  in- 
vestments, while  most  other  investors  make  no  adequate 
return  of  property  thus  loaned.  The  holder  of  mortgaged 
real  estate  gets  comparatively  little  benefit  from  the  de- 
'  Chiefly  those  whose  property  is  held  in  tnist. 


454  GOVERNMENT  REVENUE. 

duction,  because  the  theory  that  such  loans  are  taxable 
against  the  lender  drives  enough  honest  investors  out  of 
the  mortgage  loan  market  to  keep  the  rate  of  interest 
higher  than  it  otherwise  would  be.  The  only  real  bene- 
ficiary is  the  unscrupulous  investor  who  profits  by  the 
high  interest  rate  and  makes  no  tax  return. 

Th6  chief  obstacle  to  a  change  in  system — apart  from 
the  reluctance  of  legislators  to  abandon  the  old  principle 
of  taxing  persons  instead  of  things — is  found  in  the  appar- 
ent loss  to  communities  of  lenders,  in  allowing  property 
which  their  citizens  own  to  be  taxed  in  the  place  where  it 
is  invested.  But  the  actual  amount  collected  in  this  way 
is  very  small  in  proportion  to  the  vexation  involved. 

Another  objection  urged  against  this  plan  is  that  real 
estate,  which  is  already  overburdened,  will  suffer  still 
more,  while  personal  property  will  be  correspondingly 
relieved.  But  the  secondary  result  of  relieving  the  lender 
from  taxation,  owing  to  increased  competition  among 
different  lenders,  will  be  a  lowering  of  the  rate  of  interest  ; 
and  the  holders  of  personal  property  will  thus  indirectly 
pay  a  larger  share  of  the  taxes  than  they  now  do.  If 
such  loans  can  be  reached  by  this  indirect  method,  one  of 
the  largest  items  of  personal  property  will  be  taxed  ;  and 
a  very  large  part  of  the  remainder  can  be  reached  by  taxes 
on  corporations. 

§  504.  In  the  assessment  ot  corporate  property,  as  in 
that  of  real  estate,  no  deduction  should  be  allowed  for  in- 
debtedness. If  the  attempt  is  made  to  tax  the  debt  in 
the  hands  of  the  holders,  it  will  fail.  The  tax  should 
reach  the  whole  property  of  the  corporation  without 
reference  to  the  question  of  its  ownership.  In  that  way, 
and  in  that  way  only,  will  it  be  evenly  distributed.  If  the 
market  price  of  the  securities  is  used  as  a  means  of  ascer- 
taining the  value  of  such  property,  bonds  as  well  as  stock 
should  be  included  in  the  estimate.  It  affords  opportuni- 
ties for  evasion  no  less  than  for  injustice  if  two  railroads. 


STOPPAGE  AT  SOURCE.  455 

physically  alike,  pay  different  rates  of  taxes  because  the 
capital  of  the  one  was  largely  borrowed  while  that  of  the 
other  was  subscribed. 

§  505.  The  attempt  to  levy  taxes  on  the  thing  where 
the  value  originates,  rather  than  on  the  person  who  re- 
ceives the  benefit  of  such  value,  is  known  as  the  policy  of 
stoppage  at  source.  It  is  the  most  effective  means  which 
has  been  devised  for  combining  economy  in  collection 
with  efficiency  in  reaching  those  who  ought  to  pay  the 
tax,  honest  and  dishonest  alike.  Its  effects  are  perhaps 
even  more  clearly  illustrated  in  income  taxes  than  in 
property  taxes.  It  makes  comparatively  little  difference 
to  an  honest  man  whether  he  receives  his  full  income  and 
deducts  the  amount  necessary  to  pay  the  tax,  or  whether 
he  receives  his  income  less  the  deductions  and  then  pays 
nothing.  But  to  the  dishonest  man  it  makes  a  great 
difference  ;  for  in  the  former  case  he  has  a  large  chance 
of  avoiding  payment,  while  in  the  latter  case,  his  burdens 
are  forcibly  made  equal  to  those  of  the  honest  man — a 
thing  which  results  in  benefit  both  to  the  exchequer  and 
to  the  public.  The  gain  in  certainty  of  collection  from 
stoppage  at  source  is  due  to  three  causes.  First,  the  man 
who  makes  the  payment  has  no  personal  interest  in  giving 
the  government  less  than  its  due.  Second,  the  fact  that 
income  is  earned  is  usually  much  more  observable  at  its 
source,  where  the  transactions  that  give  rise  to  it  are 
matters  of  public  observation,  than  at  the  point  of  its  re- 
ceipt, where  its  existence  can  only  be  surmised.  Third, 
so  many  of  the  payments  of  income  are  made  by  large 
corporations  to  a  number  of  shareholders  or  creditors, 
that  stoppage  at  source  substitutes  a  single  financial 
transaction,  easily  and  economically  controlled,  for  a 
whole  series  of  individual  transactions  involved  in  col- 
lecting the  tax  from  the  recipients,  whose  very  number 
tends  to  multiply  both  the  uncertainty  and  the  expense 
of  collection. 


456  GOVERNMENT  REVENUE. 

Of  course  the  adoption  of  this  principle  interferes  with 
the  possibility  of  laying  progressive  income  taxes  whereby 
the  rich  pay  a  larger  percentage  than  the  poor  ;  but  if,  as 
generally  happens,  the  effort  to  make  the  rich  pay  more 
than  their  share  by  a  complicated  tax  system,  actually  re- 
sults in  letting  them  pay  less  than  their  share,  we  need 
not  take  great  account  of  this  objection,  in  the  present 
stage  of  industrial  society. 

§  506.  The  second  source  of  uncertainty  arises  from 
doubt  as  to  the  actual  value  of  the  property  or  transac- 
tions assessed. 

It  is  always  very  difficult  to  determine  the  actual  net 
earnings  of  a  business.  The  gross  earnings  are  compara- 
tively easy  to  ascertain.  The  difficulty  is  to  determine 
what  deductions  should  be  made  from  them  before  we 
reach  what  is  available  as  net  income.  Take  the  case  of  a 
railroad.  It  should  obviously  deduct  the  expenses  of  run- 
ning trains,  maintaining  stations,  equipment,  and  track, 
and  paying  the  salaries  of  its  officers.  But  what  consti- 
tutes maintenance  of  track  or  equipment  ?  Shall  the 
company  simply  aim  to  make  ordinary  repairs  ?  This  will 
cause  the  road  to  deteriorate  from  year  to  year  as  new 
inventions  arise,  so  that  the  income  will  really  not  be  so 
large  as  it  appears.  Or  shall  it  try  to  pay  for  all  improve- 
ments out  of  earnings?  This  is  going  to  the  other  ex- 
treme, and  will  make  it  appear  that  a  very  prosperous  road 
has  no  net  income  at  all.  The  conception  of  net  income, 
simple  as  it  appears,  is  really  very  difficult  to  apply  in 
practice,  and  involves  so  much  possible  litigation  that 
many  states  prefer  to  substitute  a  low  tax  on  the  gross 
earnings  of  corporations  for  a  somewhat  higher  tax  on 
their  net  earnings.  The  latter  would  be  the  more  equi- 
table ;  for  a  tax  on  gross  earnings  bears  hard  on  a  corpora- 
tion which  is  doing  large  business  at  low  rates  and  a  small 
margin  of  profit.  But  the  superior  certainty  of  the  tax 
on  gross  earnings  outweighs  its  theoretical  disadvantages. 


DOUBLE    TAXATION.  457 

In  like  manner  there  is  a  tendency  among  those  charged 
with  customs  administration  to  prefer  specific  duties, 
based  oh  the  weight  or  measure  of  goods  imported,  to 
ad  valorem  duties,  calling  for  a  percentage  of  their  value. 
Although  the  specific  duty  is  the  less  equitable  in  theory, 
and  has  the  added  disadvantage  of  becoming  more  and 
more  protective  as  time  goes  on  (§484),  the  multiplication 
of  chances  of  fraud  \xx\A&x  \h.&  ad  valorem  system  is  apt 
to  turn  the  balance  in  favor  of  specific  duties. 

§  507.  The  third  source  of  uncertainty  arises  from 
danger  of  collusion  between  the  assessors  and  those  who 
pay  the  taxes.  This  comes  about  chiefly  where  minor 
civil  divisions  are  asked  to  contribute  to  the  general 
government  on  the  basis  of  their  assessed  valuation.  For 
local  purposes  it  makes  no  difference  to  a  town  whether 
its  citizens  pay  a  tax  of  one  per  cent,  on  a  valuation  of 
$2,000,000,  or  two  per  cent,  on  a  valuation  of  $1,000,000. 
But  if  they  are  asked  to  contribute  to  the  general  govern- 
ment, the  community  with  the  low  valuation  will  have  an 
advantage ;  and  the  desire  to  secure  such  advantages  will 
lead  the  local  authorities  to  a  system  of  undervaluation 
which  may  easily  result  in  great  irregularities.  No  board 
of  equalization  can  correct  such  an  evil.  For  certainty 
of  valuation  it  is  indispensable  that  the  objects  of  national 
and  local  taxation  should  be  kept  as  far  as  possible  separ- 
ate from  one  another. 

§  508.  It  is  scarcely  necessary  to  add  that  double  taxa- 
tion should  be  avoided,  in  the  interest  of  certainty  no 
less  than  of  economy  and  of  equity.  In  the  United 
States  the  sentiment  against  double  taxation  is  so  strong 
that  each  tax  is  made  a  pretext  for  evading  the  other. 
In  Europe,  the  objection  to  double  taxation  is  not  so 
strongly  felt  and  the  evasion  which  results  from  its  appli- 
cation is  probably  less  ;  but  in  any  event  it  can  hardly  be 
other  than  a  wasteful  method. 

§  509.  A  tax  which  meets  the  requirements  of  certainty 


458  GOVERNMENT  REVENUE. 

tends  to  become  more  equitable  as  time  goes  on.  It  may 
impose  an  unnecessary  aggregate  burden  on  the  commu- 
nity, which  will  continue  from  year  to  year ;  but  the  ine- 
quality of  the  burden  will  tend  to  reduce  itself.  For 
capital  will  not  be  invested  in  lines  or  in  places  where  the 
rate  of  profit  is  much  lower  than  the  average ;  and  any 
tax  which  lowers  the  rate  of  profit  tends  to  diminish  the 
supply  of  products  and  thus  to  increase  the  price,  putting 
the  burden  largely  upon  the  consumers  instead  of  the 
producers. 

Let  us  a  take  a  concrete  illustration.  Assume  that 
railroads  were  taxed  at  a  higher  rate  than  any  other  kind 
of  property.  At  first  this  would  be  an  injustice  to  the 
owners  of  railroads  ;  but  as  time  went  on  fewer  roads 
would  be  built  and  the  managers  of  those  already  existing 
would  charge  higher  prices  on  account  of  the  demand  for 
transportation  which  they  alone  were  able  to  meet.  Part 
of  the  burden  of  the  tax  would  thus  be  placed  on  the 
consumers.  Meantime  the  lessened  demand  for  railroad 
labor  would  tend  to  reduce  either  the  number  or  the 
wages  of  railroad  employees ;  and  the  reduction  in  the 
demand  for  coal  and  for  iron  consequent  upon  the  di- 
minished extent  of  railroad  construction  would  transfer 
part  of  the  burden  to  those  industries  also.  As  this 
shifting  process  extended  itself  year  after  year  it  would 
include  a  wider  circle  of  industries  within  its  scope,  and 
it  would  not  cease  until  the  profits  of  railroad  enterprise 
which  were  at  first  reduced  by  the  tax,  finally  adjusted 
themselves  to  the  same  general  level  which  prevailed  in 
other  industries. 

If  the  tax  is  not  thus  shifted  by  a  change  in  the  supply 
of  products,  it  shows  that  the  capitalists  were  obtaining  a 
monopoly  profit  before  the  imposition  of  the  tax ;  and  that 
the  apparent  inequality  due  to  the  failure  to  shift  such  a 
tax  really  puts  the  burdens  where  they  belong — among 
those  who  have  a  distinct  surplus  under  the  processes  of 
exchange  or  distribution.  _ 


DIRECT  AND  INDIRECT   TAXES.  459 

§  510.  If  all  taxes  were  continuous  in  their  operation,  we 
might  trust  to  this  shifting  process  to  make  them  equitable. 
We  might  fairly  assume  that  in  the  long  run  the  men  who 
were  able  to  pay  the  taxes  would  pay  them,  while  those 
who  were  unable  to  pay  would  be  crowded  out  of  an  indus- 
try. We  could  judge  of  the  goodness  or  badness  of  a  tax 
by  comparing  the  benefits  derived  from  its  proceeds  with 
the  evils  resulting  from  this  crowding-out  process.  We 
could  set  ourselves  to  work  to  devise  a  tax  system  which 
should  raise  the  necessary  revenue  with  a  minimum  of 
industrial  pressure.  But  the  matter  is  not  thus  simple. 
Taxes  are  not  continuous  in  their  operation.  New 
grounds  of  expenditure  arise  which  necessitate  either  an 
imposition  of  new  taxes  or  an  increase  of  old  ones. 
Changes  in  industrial  method  may  intensify  this  need  by 
rendering  the  old  taxes  less  productive ;  or  they  may 
operate  in  the  reverse  direction  and  produce  a  surplus 
which  gives  ground  for  a  well-founded  claim  for  reduction 
in  tax  rates.  But  whenever  any  tax  is  increased  or  reduced 
a  change  of  economic  burdens  is  created,  which  it  takes 
time  to  adjust,  and  which  may  for  months  or  years  impose 
upon  certain  individuals  an  undue  share  of  contributions 
to  the  public  revenue,  before  the  matter  finally  adjusts 
itself  in  an  equitable  fashion. 

§  511.  It  is  in  this  connection  that  the  distinction 
between  direct  and  indirect  taxes  becomes  one  of  domi- 
nant importance. 

A  direct  tax,  as  ordinarily  defined,  is  one  which  is 
levied  upon  the  person  who  is  expected  to  pay  it ;  an  in- 
direct tax  is  one  whose  burden  is  presumably  shifted  upon 
some  one  else.  An  income  tax  is  generally  of  the  former 
class.  The  man  against  whom  it  is  charged  is  expected 
to  pay  it  at  his  own  loss.  A  customs  duty  belongs  to  the 
latter  class.  The  importer  pays  it  to  the  government ; 
but  it  is  expected  that  he  will  charge  the  greater  part  if 
not  the  whole  of  it  to  the  man  who  buys  the  article,  so 


460  COVERNMEKT  REVENUE. 

that  the  tax  will  ultimately  be  paid  by  the  consumer 
instead  of  the  importer. 

There  is  no  doubt  that  there  is  a  real  distinction 
between  these  two  kinds  of  taxes ;  but  there  is  a  great 
deal  of  doubt  whether  the  distinction  just  drawn  (which  is 
that  of  Smith  and  of  Mill)  correctly  marks  the  line  between 
them.  Some  taxes  which  are  undoubtedly  direct  are 
shifted  at  once  by  legal  authority  ;  for  instance  when 
a  tax  on  rents  is,  as  a  matter  of  administrative  conven- 
ience, collected  from  the  man  who  pays  the  rent  with  the 
understanding  that  he  will  deduct  it  from  what  he  after- 
ward hands  over  to  the  owner  under  previous  contracts. 
Again,  nearly  all  taxes  on  income  or  on  property  are,  as 
we  have  seen,  gradually  shifted,  even  though  the  law 
makes  no  provision  for  such  a  process  ;  and  a  sharp  appli- 
cation of  Smith's  definition  would  give  the  term  "  direct 
tax  "  a  meaning  very  much  narrower  than  that  which  it 
has  in  current  usage. 

In  view  of  this  difficulty,  Continental  writers  have  gen- 
erally preferred  to  define  direct  taxes  as  those  which  are 
assessed  on  persons  (or  property)  and  indirect  taxes  as 
those  which  are  levied  on  acts.  This  is  correct  enough 
in  its  practical  applications.  But  it  fails  to  indicate  any 
real  distinction  of  principle  ;  and  therefore,  in  a  consider- 
able number  of  cases  which  can  be  regarded  in  either  light 
{e.g.  taxes  on  occupations)  we  cannot  use  the  definition 
as  a  criterion.  We  decide  on  unformulated  grounds  to 
which  class  a  tax  belongs  and  interpret  our  definition 
accordingly. 

§  512.  In  order  to  find  the  real  ground  for  the  distinction, 
we  must  consider  the  different  ways  in  which  taxes  are 
shifted. 

I.  In  some  cases  the  transfer  is  a  perfectly  simple  one. 
The  person  who  pays  the  tax  to  the  government  deducts 
the  amount  of  that  tax  from  payments  which  he  would 
otherwise  have  been  compelled  to  pay  to  some  one  elsfe. 


mCIDENCE   OF   TAXATION.  46 1 

A  corporation  pays  a  tax,  and  correspondingly  reduces  the 
amount  which  would  otherwise  have  gone  to  the  security- 
holders. A  man  who  occupies  a  house  may  be  compelled 
to  pay  a  tax  on  its  rental  with  the  understanding  that  he 
is  to  deduct  this  tax  from  the  payment  which  he  makes  to 
the  owners. 

2.  Some  taxes  are  transferred  by  commercial  compe- 
tition. A  customs  or  excise  duty  is  largely  paid  by  the 
consumers,  not  voluntarily,  but  because  the  dealers  find  it 
impossible  to  furnish  the  goods  at  the  price  which  pre- 
vailed before  the  imposition  of  the  duty ;  and  this  reduc- 
tion in  current  supplies  produces  competition  among 
buyers,  until  the  price  rises  high  enough  to  compensate 
the  importers  for  their  expense  under  the  new  conditions 
of  trade. 

3.  Some  taxes  are  transferred  only  by  industrial  com- 
petition (§  icxd),  instead  of  commercial ;  not  by  the  com- 
petition of  buyers  for  a  supply  of  products  which  the  tax 
suddenly  reduces,  but  by  the  withdrawal  of  capital  in- 
vested in  certain  lines  where  the  tax  has  borne  heavily, 
and  a  slow  indirect  readjustment  of  the  relations  of  sup- 
ply and  demand.  It  is  not  always  possible  to  distinguish 
sharply  from  one  another  the  effects  of  commercial  and 
industrial  competition  ;  but  there  is  a  clear  general  line 
of  distinction  between  the  quick  adjustment  under  the 
one  process  and  the  slow  adjustments  under  the  other. 

§  513.  With  the  third  of  these  means  of  shifting  taxes, 
the  distinction  between  direct  and  indirect  taxation  has 
nothing  to  do.  The  terms  direct  and  indirect  apply  to 
immediate  incidence,  not  to  ultimate  incidence.  A  tax 
is  said  to  be  direct  when  its  immediate  burden  is  shifted 
only  by  the  first  of  these  processes,  and  therefore  falls 
within  the  prevision  of  the  legislator.  It  is  said  to  be 
indirect  when  its  immediate  burden  is  shifted  by  the  sec- 
ond of  these  processes,  and  cannot  be  at  all  accurately 
foreseen  by  the  legislator.     To  the  former  class  belong 


462  GOVERNMENT  REVENUE. 

property,  income,  and  inheritance  taxes,  no  matter  from 
whom  they  may  be  first  collected  ;  also  poll  taxes,  and 
franchise  taxes  in  their  various  forms.  The  latter  class  is 
exemplified  by  excise  and  customs  duties. 

§  514.  Indirect  taxes  are  not  generally  available  for 
local  purposes.  If  a  locality  attempts  to  tax  a  certain 
class  of  acts  while  neighboring  localities  do  not,  it  is  apt 
to  result  in  driving  business  from  the  place  where  it  is 
taxed  to  that  where  it  is  untaxed  ;  disturbing  trade  while 
the  process  of  adjustment  is  going  on,  and  leaving  com- 
paratively little  revenue  after  it  is  completed.  There  are 
exceptions  to  this  rule  ;  for  instance  the  octroi,  or  tax  on 
provisions  entering  the  close  walled  towns  of  continental 
Europe.  But  the  general  tendency  as  time  goes  on  is  to 
leave  the  collection  of  indirect  taxes  more  and  more  to 
the  central  authorities.  The  local  governments  are  thus 
compelled  to  rely  on  direct  taxation  as  the  chief  source 
of  their  revenue. 

The  central  government  can  use  either  form  of  taxation 
it  pleases.  It  will  generally  collect  a  large  part  of  its 
income  by  indirect  taxes,  using  direct  taxation  to  make 
up  any  temporary  or  fluctuating  deficit.  It  is  in  some 
respects  desirable  to  restrict  direct  national  taxation  to  a 
minimum  ;  for  if  the  proceeds  of  a  direct  tax  on  the  prop- 
erty or  income  of  one  locality  are  used  for  purposes  in 
which  other  localities  are  exclusively  interested,  there  is  a 
feeling  of  injustice  which  cannot  come  up  in  the  same 
form  when  each  section  uses  its  own  taxes  for  its  own 
purposes.  There  are,  however,  certain  forms  of  direct 
taxation  which  cannot  advantageously  be  levied  by  mu- 
nicipal assessment.  This  is  notably  the  case  with  taxes 
on  large  corporations.  The  value  of  a  railroad  is  by  no 
means  the  sum  of  the  values  of  the  separate  pieces  of 
property  in  the  different  towns  through  which  it  runs. 
It  is  much  greater  than  this ;  and  it  can  only  be  properly 
determined  by  being  assessed  as  a  unit.     The  taxation. of 


INCOME  AND  PROPERTY   TAXES.  463 

corporations  in  America  has  mostly  been  in  the  hands  of 
the  States ;  but  with  the  rapid  growth  of  industrial  con- 
solidation, interstate  tax  problems  are  beginning  to  have 
increasing  importance.  Even  though  the  revenues  from 
this  source  continue  to  be  used  for  State  purposes,  it 
seems  inevitable  that  their  assessment  and  apportionment 
should  be  under  national  control  if  we  are  to  avoid  the 
double  taxation  and  other  evils  which  prevail  in  the 
present  system. 

§  515.  Most  direct  taxation  is  necessarily  based  upon 
wealth,  because  the  possession  of  wealth  is  the  chief  cri- 
terion of  a  person's  ability  to  bear  an  additional  tax. 
But  whether  such  ability  is  best  judged  by  measuring 
wealth  as  capital,  and  imposing  a  property  tax,  or  by 
measuring  it  as  income,  and  taxing  it  accordingly,  is  a 
question  on  which  there  is  no  unanimity.  The  bulk  of 
European  judgment  and  practice  favors  the  latter  method  ; 
in  America  the  former  is  in  more  general  use. 

The  theoretical  arguments  as  to  the  merits  of  the  two 
methods  are  rather  inconclusive.  At  first  sight,  income 
seems  a  fairer  measure  of  ability  than  accumulations  ;  for 
the  receipt  of  income  represents  present  •  productive 
capacity,  while  the  possession  of  savings  does  not.  But 
it  must  be  remembered  that  a  man  who  has  a  current 
income  of  $10,000  and  no  savings  is  practically  compelled 
to  lay  aside  a  considerable  proportion  of  it  for  the  future ; 
and  a  system  which  taxes  him  at  the  same  rate  as  the 
man  who  has  the  same  income  from  invested  capital 
creates  gross  inequality  of  burden.  So  conspicuous  is 
this  fact  that  many  of  those  who  believe  in  taxing  income 
rather  than  property,  would  levy  a  lower  rate  upon  per- 
sonal earnings  than  upon  income  from  investments. 

There  is  an  argument  often  urged  in  favor  of  an  income 
tax  which,  when  carefully  examined,  appears  unsound. 
It  is  said  to  be  essential  for  the  community  that  taxes 
should  be  paid  out  of  current  income  rather  than  past 


464  GOVERNMENT  REVENUE. 

accumulations ;  that  a  tax  on  property  as  distinct  from 
income  is  really  a  tax  on  accumulations  and  a  discourage- 
ment to  saving.  This  argument  depends  for  its  force 
on  the  assumption  that  a  tax  on  income  will  be  paid  out 
of  income  and  a  tax  on  property  paid  out  of  capital ;  an 
assumption  for  which  there  seems  to  be  no  warrant.  For 
capital  and  income  are  not  separate  things ;  they  are 
different  ways  of  measuring  the  same  thing.  Capital  is 
constantly  being  converted  into  income,  and  income  into 
capital.  A  tax  is  really  paid  out  of  capital  when  its 
effect  is  to  make  the  amount  of  accumulations .  at  the 
end  of  the  year  less  than  they  otherwise  would  be ;  it  is 
paid  out  of  income,  when  the  expenditures  of  the  year 
are  reduced  to  meet  the  tax,  so  that  the  amount  of 
accumulation  remains  unimpaired.'  If  an  income  tax 
bears  heavily  on  the  men  who  would  otherwise  make 
savings,  it  is  paid  out  of  the  nation's  capital ;  if  a  property 
tax  causes  the  property  owner  to  reduce  his  current  ex- 
penses, it  is  paid  out  of  income.  There  seems  to  be  no 
direct  relation  between  the  form  in  which  taxes  are 
assessed  and  the  choice  of  means  adopted  to  pay  them. 

§  5 16.  Apart  from  the  possibility  of  progressive  or  com- 
pensatory taxation,  (§§  517,  518)  the  theoretical  advan- 
tages and  disadvantages  of  income  and  property  taxes 
are  so  closely  balanced  that  the  question  between  them 
must  be  decided  on  the  basis  of  certainty  of  assessment 
and  ease  of  collection.  In  the  former  respect  the  property 
tax  has  perhaps  a  slight  advantage.  The  measurement  of 
capital  presents  fewer  theoretical  difficulties  than  the 
measurement  of  income ;  for  we  have  to  make  a  number 
of  uncertain  deductions  in  the  latter  case  which  are  not 
involved  in  the  former.  But  practically  our  choice  depends 
on  the  preferences  and  habits  of  the  people.  If  they  are 
accustomed  to  an  income  tax  rather  than  a  property  tax 

'  The  desirableness  of  this  condition  is  by  no  means  so  self-evident  as  som« 
people  suppose.     Compare  §  161. 


PROGRESSIVE    TAXATION.  465 

we  may  expect  better  results  to  be  reached  on  taxing  in- 
come. If  they  are  more  accustomed  to  the  property  tax 
the  case  will  be  reversed.  The  experience  of  the  United 
States  immediately  after  the  war,  contrasted  with  that 
of  most  European  states,  shows  how  great  may  be  the 
difference  in  productiveness,  in  equity,  and  in  popularity, 
of  similar  taxes  in  different  communities.' 

§  517.  It  is  a  more  important  question  whether  we 
should  strive  to  have  equality  or  progression  in  our  direct 
taxes  ;  whether  we  should  tax  each  source  of  wealth  in 
proportion  to  its  value  or  whether  we  should  try  to  tax 
the  strong  man  at  a  relatively  higher  rate  than  the  weak 
man.  The  latter  policy  is  urged  on  two  grounds  ;  first, 
because  in  all  the  early  stages  of  their  operation  indirect 
taxes,  by  raising  the  price  of  articles  of  consumption, 
affect  the  poor,  who  spend  their  incomes,  relatively  more 
than  the  rich,  who  have  a  large  surplus  which  they  do  not 
spend  ;  second  and  more  important,  because  any  increase 
of  direct  taxes  which  may  be  needed  to  meet  a  current 
emergency  hurts  the  poor  man,  far  more  than  it  hurts  the 
rich  man.  If  a  man  makes  only  enough  to  keep  himself 
and  his  family  alive,  the  imposition  of  a  tax  will  cause 
some  of  them  to  starve.  The  process  of  adjustment  by 
which  wages  are  raised  to  meet  such  a  tax  will  only  be 
brought  about  after  most  acute  suffering  and  irreparable 
loss. 

'  The  notorious  evils  in  the  working  of  the  general  property  tax  in  the 

United  States  have  created  some  prejudice  against  this  mode  of  assessment. 

But  the  inequalities  of  this  tax  are  less  than  those  which  the  country  suffered 

under  the  income  tax  ;  and  both  are  more  conspicuously  the  result  of  want 

of  certainty  than  of  want  of  equity.     The  evils  were  not  due  to  the  fact  that 

property  was  a  bad  basis  of  assessment,  but  to  the  fact  that  much  property 

which  was  nominally  subject  to  assessment  was  not  reached  at  all.     If  local 

expenses  were  met  by  taxes  on  local  real  estate  only,  no  deduction  being 

made  for  debts,  and  if  state  expenses  were  largely  met  by  corporation  taxes, 

which  the  exemption  of  personal  property  from  local  assessment  would  make 

possible  and  equitable,  we  should  be  likely  to  have  a  tax  system  which  would 

be  efficient,  elastic,  and  reasonably  just. 
30 


466  GOVERNMENT  REVENUE. 

These  objections  do  not  apply  so  directly  to  a  tax 
on  property  as  to  a  tax  on  income.  Even  a  small  property 
gives  its  owner  a  certain  leeway  when  a  new  tax  is  im- 
posed, and  prevents  him  from  starving  as  long  as  his 
accumulations  hold  out.  It  may  be  a  misfortune  and  an 
injustice  to  deprive  him  of  part  of  his  savings;  but  it  is 
not,  in  most  instances,  a  direct  deprivation  of  all  im- 
mediate means  of  support.  A  property  tax  can  therefore 
be  made  general  without  immediate  disaster  ;  while  an 
income  tax  practically  involves  the  exemption  of  a  mini- 
mum '  income  necessary  for  the  support  of  a  family. 

§  518.  Any  such  exemption  causes  the  large  incomes 
to  be  taxed  at  a  higher  rate  than  the  smaller  ones.  Thus 
if  $iocx)  is  exempt  from  taxation,  and  the  excess  above 
that  sum  is  taxed  five  per  cent, 

An  income  of  $1000  pays    $0  or  o    per  cent 
«        "        "     1500  25       If    "      " 

«        "        "     2000  50      2\    "      " 

«        «        «     2500  75       3       "      " 

"        «        «     3000  100      i\    "      " 

and  so  on  with  constantly  increasing  percentages.  But 
when  we  come  to  deal  with  really  large  incomes  the 
changes  of  rate  due  to  this  cause  are  very  slight  in 
amount.  Thus,  an  income  of  $50,000  in  the  case  sup- 
posed  will  pay  at  the  rate  of  43^^  per  cent ;  while  an 
income  of  double  the  amount  will  pay  at  the  rate  of 
AW  P^r  cent.  The  difference  between  the  two  rates  is 
hardly  noticeable  in  comparison  with  the  difference  in 
wealth  of  the  two  individuals.  Under  these  circum- 
stances, all  the  more  radical  champions  of  progressive 
taxation  insist  on  an  increasing  rate  as  well  as  on  the 
exemption  of  a  fixed  minimum.  The  increasing  rate  is 
used  in  several  countries  of  continental  Europe,  and  is 
perhaps  most  conspicuously  exemplified  in  Switzerland. 

'  It  depends  upon  the  judgment  of  the  legislature  how  high  this  minimum 
shall  be  fixed.     There  is  no  well-recognized  standard  in  fiscal  usage. 


TAXATION  OF  MONOPOLIES.  467 

There  can  be  no  reasonable  doubt  that  a  progressive  tax, 
if  collected^  imposes  the  immediate  burdens  where  they  can 
be  borne  with  least  hardship.  But  it  seems  equally  cer- 
tain that  such  a  system  increases  the  difficulty  of  collec- 
tion. It  makes  it  necessary  to  assess  the  tax  against  the 
actual  recipient  of  the  income  in  such  a  way  as  to  make 
the  principal  of  stoppage  at  source  quite  inapplicable. 
In  so  -far  as  the  uncertainty  from  this  cause  makes  itself 
felt,  the  attempt  to  secure  progression  does  a  permanent 
harm  which  outweighs  any  temporary  good.  For  it 
must  be  constantly  kept  in  mind  that  the  need  for 
equalization  of  burdens  which  progression  aims  to  meet 
is  a  transient  one,  which  will  in  any  event  be  gradually 
met  by  the  process  of  industrial  competition  ;  while  the 
equalization  that  depends  upon  certainty  is  a  permanent 
matter,  which  will  not  adjust  Itself  under  any  law,  how- 
ever well  meant,  that  fails  to  secure  such  certainty. 

§  519.  An  effort  is  often  made  to  combine  certainty  of 
collection  with  equality  of  immediate  burden  by  exempt- 
ing competitive  gains  and  taxing  monopolized  advantages 
— especially  those  of  landed  property.  Some  have  gone 
so  far  as  to  believe  that  a  single  tax,  on  this  basis  alone, 
would  afford  the  government  its  necessary  revenue  with 
a  minimum  of  hardship,  and  perhaps  with  a  positive  inci- 
dental gain. 

If  we  make  use  of  the  method  employed  in  §  295  (Fig. 
9)  we  shall  see  that  a  tax  which  is  made  proportionate 
to  the  income  from  a  given  business  usually  puts  severe 
burdens  on  consumers  and  on  laborers.'  If,  to  the  ex- 
pense of  production  qy  •\- yx  (wages -f-  interest,)  there  be 
added  a  tax  xt  (Fig.  1 1),  the  quantity  sold  must  gradually 
fall  until  a  new   point  of  equilibrium  between  demand 

'  The  effect  here  described  is  most  immediate  if  the  tax  is  placed  on  the 
consumer  (indirect  taxation).  It  is  much  slower  in  the  taxation  of  labor, 
and  probably  slower  still  in  the  taxation  of  capital ;  but  the  final  adjustment 
tends  to  be  the  same  in  all  cases. 


468 


GOVERNMENT  REVENUE. 


and  supply  is  established.     At  this  point  the  price  Op* 
will  cover  wages  -\-  interest  +  taxes  (^'y  •\-y'x'  +  ^'^'  )• 


The  amount  of  government  revenue  will  be  represented 
by  the  rectangle  rx't'p' .  The  losses  incident  to  the  col- 
lection of  this  revenue  will  be  as  follows  : 

1.  The  consumers  have  to  go  without  a  certain  amount 
of  goods  q'q. 

2.  A  rise  in  price  reduces  the  consumers*  surplus  from 
the  series  of  transactions  from  pxb  (Fig.  9)  to  p't'b  (Fig. 

11). 

3.  The  labor  which  produced  the  goods  q'q  is  thrown 

out  of  employment. 

4.  A  fall  in  wages  reduces  the  producers'  surplus  from 
ayw  (Fig.  9)  to  ay'w'  (Fig.  1 1). 

5.  The  field  of  investment  of  capital  is  reduced  by  the 
amount  of  reduction  of  wages. 

§  520.  According  to  the  advocates  of  the  single  tax 
theory,  most  of  this  burden  is  an  unnecessary  imposition 
on  society,  due  to  the  taxation  of  competitive  gains  on  the 
same  basis  as  monopolized  gains. 

We  have  seen  (§  319)  that  in  many  lines  the  expense  of 
production  of  the  same  article  varies  widely  for  different 
competitors.  Some  of  those  who  are  engaged  in  its  pro- 
duction obtain  a  differential  gain.  If  we  can  tax  this  gain 
and  not  tax  the  men  who  fail  to  secure  it,  we  shall  avoid 


TAXES  ON  DIFFERENTIAL   GAINS. 


469 


most  of  the  evils  described  in  the  preceding  section.  The 
quantity  of  goods  produced  will  not  be  altered  ;  for  the 
tax  will  only  affect  those  men  who  produce  the  goods  at 
a  special  advantage,  and  these  will  prefer  to  pay  the  tax 
rather  than  abandon  an  exceptionally  profitable  business. 
Therefore  all  the  laborers  will  be  employed  at  the  old 
wages,  and  all  the  consumers  served  at  the  old  prices ;  the 
revenue  of  the  government  will  be  furnished  by  those 
who  can  afford  to  pay  taxes  and  who  will  not  be  led  to 
change  their  occupation  by  so  doing. 

This  state  of  things  may  be  roughly  represented  as  fol- 
lows (Fig.  12).     With  a  demand  curve  bb'  and  a  price  Op 


at  which  the  supply  equals  the  demand  we  shall  find  that 
payments  to  laborers  for  producing  different  parts  of  the 
supply  vary  from  a  maximum  qy  to  a  minimum  01.  The 
total  profit  to  the  capitalists  who  advance  those  wages 
is  lyxp.  But  of  this  profit  there  are  deductions  to  be 
made  for  interest  varying  from  a  maximum  xy^  to  a 
minimum  pc.  The  total  amount  chargeable  as  interest  is 
thus  represented  by  pxyc.  If  we  can  tax  the  surplus 
profit   lye   without  touching  wages  or  interest  we  shall 

'  It  will  of  course  often  happen  that  the  maximum  interest  charge  does 
not  come  on  the  same  unit  of  product  where  we  have  the  maximum  w^es; 
To  take  proper  account  of  this  fact  the  figure  would  have  to  be  made  too 
complicated  for  our  present  purposes. 


470  GOVERNMENT  REVENUE. 

obtain  our  revenue  with  the  minimum  of  immediate  bur- 
dens on  producers  and  consumers  and  the  least  disturb- 
ance to  the  channels  of  trade.' 

§  521.  We  have  already  seen  (ch.  ix.)  that  the  differen- 
tial gain  of  producers  enjoying  special  advantages  is 
divided  into  two  parts,  rent  and  profits.  The  advocates 
of  a  progressive  income  tax  claim  that  in  a  rough  way 
they  reach  both  of  these  things  pretty  effectively,  since 
the  large  fortunes  are  made  up  from  one  or  the  other  of 
these  gains  rather  than  from  wages  or  interest.  But  the 
advocates  of  a  single  tax  object  to  the  attempt  to  put  rent 
and  profits  on  the  same  basis.  They  say  that  the  sums 
received  as  profits  are  really  earned.  They  come  to  pio- 
neers who  have  led  the  way  in  industrial  progress.  They 
are  instrumental  in  putting  the  control  of  industry  into  the 
hands  of  men  who  are  competent  to  take  the  lead.  Rent 
on  the  other  hand  they  regard  as  a  dead  weight ;  as  an 
appropriation  of  the  products  of  present  industry  by  those 
who  have  laid  hands  on  the  results  of  past  service  or  of 
natural  bounty;  sometimes  even  as  a  premium  to  those  who 
stand  in  the  way  of  progress  by  keeping  land  out  of  use 
until  the  growth  of  population  has  given  it  the  increased 
value.  They  draw  a  sharp  distinction  between  the  profits 
resulting  from  the  enterprise  of  the  individual,  to  which 
that  individual  may  fairly  lay  claim,  and  the  rent  resulting 
from  the  movements  of  population,  which  equitably  be- 
longs to  the  people.     They  propose  either  to  make  the 

*  This  will  serve  to  illustrate  the  important  but  not  very  clear  proposition 
often  laid  down,  that  rent  is  not  an  element  in  the  price  of  products.  Any- 
thing that  affects  wages  or  interest  tends  at  once  to  affect  the  supply  at  pre- 
viously existing  prices,  and  to  cause  a  change  in  the  adjustment  of  supply  and 
demand.  A  change  in  economic  rent  will  not  produce  this  result,  because  it 
does  not  affect  the  marginal  producers — those  who  are  just  ready  to  increase 
or  diminish  the  supply  by  entering  or  leaving  a  business.  A  remission  of 
English  rents  would  not  change  the  price  of  wheat  materially,  because  it 
would  not  increase  either  the  amount  of  land  cultivated  or  the  amount  raised 
per  acre.  Rent  is  a  result  of  variations  in  demand  rather  than  a  cause  of 
changes  in  supply. 


THE   SINGLE    TAX.  47 1 

land  common  property  and  let  this  gain  accrue  to  the 
public  (land  nationalization  * )  or  to  leave  the  title  in 
private  hands  as  at  present,  but  tax  economic  rent  to  its 
full  amount  in  lieu  of  all  other  taxes  (single  tax  theory). 
The  latter  proposition,  in  its  modern  shape,"  owes  its  chief 
importance  to  the  popularity  of  the  writings  of  Henry 
George. 

§  522.  The  first  difficulty  with  the  modern  single-tax 
theory  arises  from  the  fact  that  we  cannot  make  any  such 
sharp  distinction  between  rent  and  profits  as  it  contem- 
plates. They  shade  into  one  another  by  insensible  grada- 
tions. Though  rent  is  more  permanent  than  profits,  we 
cannot  regard  it  as  enduring  for  all  time,  since  land  may 
lose  value  as  well  as  gain  it.  Though  rent  is  chiefly  due 
to  the  growth  of  population  rather  than  to  the  controlling 
hand  of  an  individual,  we  find  that  the  man  who  goes 
into  land  speculation  without  special  skill  in  serving  the 
public  (§  322)  is  apt  to  lose  rather  than  gain.  The  ma- 
jority of  gains  in  real  estate  speculation  have  been  made 
by  men  who  have  developed  property  at  considerable 
risk,  instead  of  waiting  for  others  to  do  it.  Exceptions 
there  are,  and  numerous  ones ;  but  the  general  rule  holds 
good  that  large  returns  on  real  estate  have  come  to  men 
who  used  their  capital  rather  than  to  those  who  kept  it 
idle.  Nor  has  the  proportion  of  failures  been  a  small 
one.     Superficial  observers  who  see  an  assured  fortune, 

'  Land  nationalization  is  more  properly  treated  here  than  in  chapter  xii. 
because  its  advocates  generally  propose  to  leave  the  actual  improvement  of 
the  land  to  private  persons  (at  most,  assisted  by  advances  of  government 
credit)  and  to  treat  the  land  as  a  source  of  revenue  and  an  instrument  of  social 
policy  rather  than  as  a  field  of  economic  experiment  by  public  authorities. 

'  The  "  Imp6t  Unique"  advocated  by  the  physiocrats,  while  superficially 
resembling  George's  proposed  plan,  differed  from  it  radically  in  principle. 
The  physiocrats  proposed  to  tax  the  surplus  of  food  above  what  was  neces- 
sary for  the  maintenance  of  the  laborer  ;  while  George  deals  with  a  surplus 
of  market  price  above  expense  of  production.  The  Ricardian  idea  of  a  dif- 
ferential gain  which  is  so  prominent  in  the  latter  proposal  had  not  made  itself 
felt  in  the  former. 


472  GOVERNMENT  REVENUE. 

are  apt  to  think  that  it  was  so  assured  from  the  outset, 
and  to  overlook  the  fact  that  the  gains,  which  we  see,  are 
survivals  amid  the  wreck  of  less  successful  investments 
which  have  been  forgotten. 

The  single  tax  theory  in  its  more  pronounced  forms 
would  deprive  the  man  who  has  made  successful  invest- 
ments in  real  estate  of  any  surplus  above  the  current  rate 
of  interest.  Would  it  guarantee  him  against  losses?  If 
it  did  not  do  so,  it  would  destroy  the  motives  to  invest 
capital  in  projects  of  land  improvement.  The  public  could 
not  expect  to  play  with  the  investor  at  the  well  known 
game  of  "he'ads  I  win,  tails  you  lose."  If  on  the  other 
hand  it  gave  such  a  guarantee  it  would  find  itself  com- 
pelled to  make  good  an  amount  of  loss  so  large  as  to  do 
away  with  the  expected  gains  from  the  system.  Losses 
on  real  estate  are  large  enough  at  present,  when  each  man 
acts  at  his  own  risk  ;  they  would  unquestionably  be  much 
greater  if  this  risk  was  shifted  to  society  as  a  whole.  The 
amount  and  the  certainty  of  economic  rent  are  both 
habitually  overestimated  by  the  advocates  of  the  single 
tax  theory. 

§  523.  The  ethical  and  political  difficulties  which  stand 
in  the  way  of  the  application  of  the  single  tax  theory  are 
even  more  pronounced  than  the  economic  ones.  It  is  not 
a  legal  possibility  to  appropriate  the  whole  unearned  in- 
crement by  any  speedy  process  and  to  overturn,  without 
compensation,  a  large  number  of  recognized  rights.  The 
existence  of  law  depends  on  the  continuity  of  its  applica- 
tion. The  principle  that  private  property  must  not  be 
taken  without  compensation  is  no  mere  accidental  phrase 
let  fall  by  courts  or  constitution-makers.  It  is  an  axiom 
of  political  science.  If  the  progress  of  society  renders 
the  abolition  of  an  institution  necessary,  compensation 
follows  as  a  matter  of  course.'     A  very  gradual  increase 

'  The  apparent  exception  in  the  matter  of  slavery  in  the  United  States  was 
due  to  the  fact  that  the  slaveholders  were  in  arms  against  the  government. 


LAND   NATIONALIZATION.  473 

of  taxes  on  economic  rent  to  which  the  owners  might  find 
time  to  adjust  themselves,  represents  the  utmost  stretch 
of  possibility  in  this  matter.  Now  if  the  fiscal  success  of 
the  single  tax  is  questionable  when  applied  to  the  whole 
unearned  increment,  past  as  well  as  future,  much  more 
must  it  be  so  if  we  leave  the  past  undisturbed  and  deal 
with  the  future  only. 

This  is  the  critical  weakness  in  land  nationalization 
plans  like  that  with  which  John  Stuart  Mill's  name  was 
identified.  The  advocates  of  this  plan  proposed  that 
England  should  buy  out  the  landowners,  and  appropriate 
the  future  gain  in  value.  No  fault  could  be  found  with 
the  equity  of  this  proposal.  But  as  a  fiscal  measure  it 
was  radically  defective.  Leaving  out  of  account  the 
inevitable  losses  due  to  a  scheme  of  quasi-compulsory 
purchase,  the  scheme  must  have  ended  in  disaster  because 
the  lands  which  it  was  proposed  to  buy  have  fallen  in 
value  instead  of  rising.  Nothing  could  more  conspicu- 
ously emphasize  the  fallacy  of  treating  economic  rent  as 
an  assured  source  of  increasing  returns,  than  the  fact  that 
Mill  was  led  astray  by  it.  He  recognized  that  improve- 
ments in  the  arts  tended  to  lower  rent;  but  he  assumed 
that  increase  in  population  would  more  than  counteract 
any  such  tendency.  The  effect  of  modern  methods  of 
transportation,  which  make  the  whole  world  compete 
with  the  English  wheat  growers,  lay  outside  the  scope  of 
his  calculation. 

§  524.  These  arguments  do  not  militate  against  reforms 
in  taxation  which  shall  carry  us  in  the  general  direction 
indicated  by  the  single-tax  theory.  Wagner,  after  an 
investigation  of  the  subject  whose  thoroughness  is  worthy 
of  the  highest  praise,  whether  we  can  accept  his  conclur 
sions  or  not,  is  inclined  to  look  with  favor  on  public  ap- 
propriation of  future  increments  in  the  value  of  city  real 

The  measure  was  recognized  as  one  of  confiscation,  justified  only  by  a  state 
of  war. 


474  GOVERNMENT  REVENUE. 

estate  as  distinct  from  agricultural  land.  Without  going 
so  far  as  Wagner,  most  economists  would  be  willing  to 
agree  that  more  taxes  should  be  assessed  upon  economic 
rent  and  less  upon  improvements.  The  present  prac- 
tice of  assessors  in  this  matter  is  a  good  illustration  of 
the  misapplication  of  the  principle  of  taxation  according 
to  ability.  The  holder  of  unimproved  real  estate  gets 
no  apparent  income  from  it ;  he  is  therefore  taxed  on  only 
a  small  percentage  of  the  market  value  of  the  property, 
while  the  owner  of  improved  land  must  pay  a  correspond- 
ingly heavier  tax.  This  puts  a  premium  on  the  worst 
sort  of  land  speculation.  The  man  who  serves  society  is 
burdened ;  the  man  who  stands  in  the  way  and  tries  to 
profit  by  others'  progress  is  encouraged  and  helped. 

§  525.  Othei  forms  of  direct  taxation  can  be  much 
more  briefly  dealt  with. 

A  poll  tax  is  in  frequent  use  ;  but  it  is  neither  productive 
nor  equitable,  and  stands  as  a  relic  of  past  methods  rather 
than  as  a  subject  of  present  importance. 

An  inheritance  tax  has  much  to  recommend  it  in  the 
fact  that  it  takes  property  for  the  use  of  the  state  at  the 
time  when  individuals  least  feel  its  loss.  It  is  also  easy  of 
collection  because  all  estates  of  deceased  persons  must 
come  under  cognizance  of  the  probate  courts,  independ- 
ently of  the  question  of  taxation.  It  is  usually  so  graded 
as  to  increase  with  the  remoteness  of  the  heir  or  legatee 
from  the  direct  line  of  kinship  with  the  deceased  ;  some- 
times increasing  also,  notably  in  a  recent  French  law,  with 
the  size  of  the  amounts  received  by  each  individual.  The 
chief  objections  to  such  a  tax  are  the  possibility  of  evading 
it  by  donations  before  death,  and  the  uncertainty  of  the 
amount  which  it  will  produce  in  any  given  year,  which 
makes  it  unavailable  as  a  calculable  source  of  immediate 
revenue.  In  spite  of  these  objections,  an  increasing 
amount  of  government  income  is  being  collected  by  this 
method. 


INDIRECT   TAXES.  475 

Taxes  on  occupations  should  be  counted  among  direct 
taxes,  though  they  approach  closely  to  indirect  taxes  in 
some  of  their  characteristics.'  They  are  less  used  in 
England  and  in  the  United  States  than  in  other  coun- 
tries, because  of  the  double  taxation  which  is  involved 
when  a  man  is  taxed  both  on  the  value  of  his  business  or 
profession  and  on  the  fact  of  exercising  it.  Of  taxes  on 
occupations  in  the  strict  sense  of  the  word,  the  one  of 
most  importance  in  the  United  States  is  the  fee  charged 
for  licenses  to  sell  liquor.  In  many  communities  this  is 
not  managed  primarily  for  revenue,  but  as  a  means  of 
restricting  the  number  of  those  engaged  in  the  business 
by  reducing  the  profits  to  which  it  gives  rise. 

Of  greater  iinportance  from  a  fiscal  point  of  view  are 
the  various  taxes  on  corporate  franchise.  The  vast 
amounts  of  personal  property  which  can  be  reached  in 
this  way  and  in  no  other,  coupled  with  the  good  grounds 
for  special  taxation  furnished  by  the  rights  granted  to 
companies  of  various  kinds,  make  this  a  field  of  great  and 
increasing  importance  for  the  tax  legislator.  A  few  of 
the  most  important  practical  rules  for  such  assessment 
have  been  laid  down  in  connection  with  the  subject  of 
certainty  in  taxation.  The  attempt  to  enter  into  further 
details  would  lead  us  beyond  the  scope  of  this  book. 

§  526.  Indirect  taxes  may  be  divided  into  three  groups: 
excise  charges,  export  duties,  and  import  duties. 

Excise  or  internal  revenue  charges,  when  fixed  at  small 
amounts,  are  often  hardly  distinguishable  from  fees. 
When  they  are  large  in  amount,  they  constitute  a  tax  on 
the  consumers  of  the  article,  so  obvious  as  to  be  quite 
unpopular.  There  is  a  tendency  in  the  United  States  to 
confine  the  imposition  of  excise  dues  to  trades  connected 

•  In  some  cases  they  are  hardly  distinguishable  from  fees.  For  instance, 
the  money  collected  by  special  taxes  on  shipping  may  be  regarded  as  a  com- 
pensation to  the  government  for  the  special  services  which  it  renders  the 
navigator  in  connection  with  harbors,  lighthouses,  and  hydrography. 


4^6  GOVERNMENT  REVENUE. 

with  the  production  of  alcohol ;  in  the  belief  that  a  high 
price  of  liquor  and  restriction  in  its  use  is  likely  to  be  of 
advantage  to  the  country.  Nations  which  have  a  customs 
tariff  for  revenue,  and  not  for  protection,  often  use  excise 
duties  as  a  means  of  preventing  the  loss  of  revenue 
that  results  from  the  establishment  of  a  home  industry 
which  diminishes  the  importation  of  articles  on  which  the 
tariff  is  imposed. 

Export  dues  are  unpopular  because  they  put  the  home 
producer  at  a  disadvantage  in  international  trade ;  and 
they  are  falling  into  disuse  on  this  account.'  For  the 
converse  reason,  taxes  on  imports  are  correspondingly 
popular.  The  apparent  advantage  to  home  industry  con- 
nected with  the  imposition  of  such  taxes,  coupled  with 
the  convenience  of  the  national  frontier  as  a  place  of  tax 
collection,  tends  to  give  import  duties  an  over-prominent 
place  in  modern  fiscal  systems. 

§  527.  For  purposes  of  revenue,  indirect  taxes  have 
several  disadvantages  as  compared  with  direct  taxes.  We 
have  already  seen  the  difificulty  of  using  them  for  local 
purposes.  Even  when  applied  for  national  objects  it  is 
hard  to  predict  the  amount  which  they  will  yield.  The 
process  of  shifting  the  tax  is  often  accompanied  by  a  con- 
traction in  the  volume  of  business  which  makes  the  return 
less  than  was  anticipated.  In  years  of  depression  when  pro- 
ductive taxes  are  most  needed,  this  contraction  often  be- 
comes disastrous.  The  loss  of  revenue  from  indirect  taxes 
in  bad  years  is  more  conspicuous  than  in  the  case  of  direct 
taxes  and  far  less  easy  to  remedy.  For  if  the  rate  of 
indirect  taxation  is  raised  to  meet  the  emergency,  the 
result  is  sometimes  just  the  opposite  of  what  was  in- 
tended. The  experience  of  the  United  States  in  taxing 
distilled  spirits  shows  that  more  revenue  is  often  obtained 
by  a  low  rate  than  by  a  high  one.     The  high  rate  at  once 

'  For  a  similar  reason  countries  with  an  extensive  excise  system  usually 
refund  the  tax  on  articles  actually  exported. 


FINES  AND  FORFEITURES.  477 

checks  consumption  and  stimulates  evasion ;  so  that  any 
increase  in  the  tax  rate  beyond  a  certain  moderate  figure 
is  more  than  counterbalanced  by  a  diminution  in  the 
amount  that  pays  taxes. 

In  the  case  of  high  import  duties  a  third  cause  often  tends 
to  increase  the  loss  of  revenue  still  further.  If  the  article 
is  one  which  can  be  produced  in  the  home  country, 
domestic  production  tends  to  take  the  place  of  imports. 
To  avoid  this  loss,  England  adopts  the  principle  of  plac- 
ing an  excise  on  the  home  product  substantially  equal  to 
the  import  duty.  IVIost  countries,  however,  find  the 
protective  feature  a  popular  one.  Some  content  them- 
selves with  the  "  incidental  "  protection  afforded  by  a 
tariff  framed  for  revenue  purposes.  Others,  instead  of  im- 
posing the  minimum  rates  which  will  secure  the  required 
revenue  by  a  low  tax  on  large  imports,  adopt  the  maxi- 
mum rates  which  will  secure  this  result  by  a  high  tax  on 
small  imports ;  thus  adopting  a  system  of  duties  framed 
for  protection  with  incidental  revenue. 

§  528.  Closely  analogous  to  the  restrictive  taxes  just 
described  are  the  fines^  and  forfeitures  exacted  from 
criminals.  In  former  times  these  constituted  a  very  con- 
siderable part  of  the  revenue  of  powerful  governments 
which  stretched  their  criminal  jurisprudence  to  meet  their 
fiscal  necessities.  This  matter  has  become  much  less  im- 
portant to-day.  The  criminal  law  is  narrower  in  its  scope. 
The  offense  of  high  treason,  which  has  been  made  the 
pretext  for  enforcing  most  extensive  forfeitures,  is  now 
for  obvious  reasons  much  rarer  than  under  the  more 
anarchic  conditions  of  feudal  times.  Under  the  well- 
grounded  feeling  that  it  is  unjust  to  make  a  man's  heirs 
suffer  for  his  misdoings,  penalties  are  made  to  attach  to 
his  person  rather  than  to  his  estate.     He  may  be  com- 

*  Many  of  the  mediaeval  fines  were  unconnected  with  criminal  law  and 
were  theoretically  fees  for  special  services,  e.  g.,  those  connected  with  the 
estates  of  minors  and  females. 


4/8  •  GOVERNMENT  REVENUE, 

pelled  to  make  good  his  damages  to  another  individual ; 
but  a  payment  to  the  government  as  a  punishment  for  a 
crime  is  often  felt  to  be  one  which  bears  too  lightly  on 
the  individual  and  too  heavily  on  his  family. 

The  revenue  from  confiscation  of  the  property  of  ene- 
mies has  also  ceased  to  have  the  importance  which  it  did 
in  feudal  times.  When  war  was  frequent,  and  the  obliga- 
tions of  international  law  and  justice  were  unrecognised, 
such  transactions  were  a  source  of  much  profit  to  the  con- 
queror. To-day  such  appropriation  of  private  property 
of  enemies  as  a  means  of  revenue  is  generally  condemned  ; 
and  even  the  demands  for  contributions  from  public 
authorities  in  a  hostile  nation  are  at  least  theoretically 
based  on  the  cost  incurred  by  the  victor  in  carrying  on 
the  war.  The  very  name  "  indemnity,"  which  is  so  fre- 
quently applied  to  such  contributions,  is  an  illustration  of 
this  theory. 

The  revenue  of  governments  from  failure  of  property 
to  find  an  owner  {escheat)  is  of  trifling  amount  where  free- 
dom of  testamentary  bequest  is  a  recognized  principle  of 
law.  That  which  comes  from  voluntary  contributions  is  in 
modern  states  almost  entirely  predestined  to  special  uses, 
and  need  not  be  treated  as  a  part  of  the  ordinary  revenue. 

§  530.  In  a  well-ordered  budget,  the  taxes  will  generally 
be  so  arranged  that  the  current  revenue  of  the  govern- 
ment is  large  enough  to  meet  its  current  expenses.  If 
this  is  not  accomplished,  a  deficit  is  carried  over  to  subse- 
quent years  in  some  form  oi  public  debt. 

If  the  government  simply  leaves  its  bills  unpaid,  letting 
the  creditors  get  what  security  they  can,  the  result  is  an 
unfunded  ov  floating  debt.  If  the  government  pays  these 
bills  by  issuing  formal  obligations  to  pay  interest  (and 
usually  principal  also)  at  dates  distinctly  specified,  and 
borrowing  money  on  the  basis  of  these  obligations,  the 
debt  is  said  to  hQ  funded.  When  these  obligations  set  a 
date  for  payment  of  the  principal   {maturity)  they  are 


PUBLIC  DEBTS.  479 

known  as  bonds.  When  the  principal  is  paid  by  the 
isssue  of  a  new  loan,  whether  at  maturity  or  before  it, 
the  operation  is  known  as  refuiiding. 

§  531.  A  nation  cannot  permanently  rely  on  loans  to 
meet  any  considerable  part  of  the  ordinary  expenses  of 
the  government.  Creditors  will  not  trust  the  agents  of  a 
treasury  which  is  managed  in  this  way.  They  will  either 
demand  payment  in  advance,  as  manufacturing  firms 
habitually  do  in  making  large  sales  to  semi-civilized  gov- 
ernments, or  they  will  insist  on  exercising  so  much  control 
over  the  fiscal  machinery  of  the  debtor  government  as  to 
deprive  it  of  a  good  deal  of  its  freedom  in  conducting 
its  own  affairs.  A  government  cannot  compel  foreign 
customers  to  give  it  credit  without  security.  It  may  ex- 
ercise a  pressure  on  domestic  customers  which  shall  tempo- 
rarily force  them  to  do  this  ;  but  the  immediate  effect  of 
this  is  a  tax  on  such  customers,  thinly  veiled  under  the 
form  of  a  loan.  Such  a  tax,  if  persisted  in,  is  almost  cer- 
tain to  prove  disastrous  alike  to  the  customers  and  to  the 
government.  It  is  a  discriminating  and  destructive  tax 
upon  the  very  people  on  whom  the  government  most 
directly  depends  for  its  current  supplies. 

One  of  the  commonest  and  at  the  same  time  most  de- 
structive forms  of  forced  loan  is  an  issue  of  irredeemable 
currency.  Any  gain  to  the  government  on  a  few  transac- 
tions is  offset  by  the  greatly  increased  prices  charged  by 
those  who  deal  with  it  in  all  subsequent  transactions.  If 
such  currency  is  ultimately  redeemed,  its  inflated  volume 
is  a  long  and  painful  burden  on  the  future  taxpayers  of 
the  nation  ;  if  it  is  not  redeemed,  it  carries  the  govern- 
ment and  many  of  the  citizens  into  virtual  bankruptcy. 

§  532.  There  are  apparently  but  two  cases  where  re- 
course to  loans  is  necessary  or  desirable  :  i.  In  an  extraor- 
dinary emergency  like  war.'     2.  In  the  case  of  permanent 

'  The  only  other  analogous  cases  would  be  those  of  flood  or  fire,  where 
present  relief  must  be  had  at  any  cost. 


48q  government  revenue, 

productive  investments,  like  state  railroads  or  telegraphs, 
which  are  made  once  for  all,  and  offer  the  prospect  of 
national  and  fiscal  advantages  for  a  long  series  of  years. 

It  is  thought  by  some  observers  that  a  loan  transfers 
the  cost  of  a  war  or  an  improvement  from  the  present 
to  the  future.  This  view  is  ridiculed  by  others  who  say 
that  the  cost  of  a  war  is  borne  by  the  generation  which 
wages  it,  and  that  a  loan  simply  shifts  this  cost  from  one 
group  of  individuals  to  another.  This  misunderstanding 
arises  from  the  two  different  sources  of  the  word  cost. 
The  cost  in  the  public  sense  is  borne  by  the  people  who 
carry  on  the  war,  not  by  their  children.  The  destruction 
of  wealth  is  a  destruction  of  present  means  of  enjoyment; 
the  pain  is  present  pain.  But  the  individual  cost  or  ex- 
pense is  shifted.  The  men  who  loan  money  to  a  govern- 
ment enable  a  certain  amount  of  wealth  to  be  devoted  to 
destruction,  just  as  much  as  if  that  money  were  extorted 
from  them  by  taxation.  But  they  do  not  part  with  their 
individual  wealth  or  property.  On  the  contrary,  they 
retain,  in  the  form  of  a  government  bond  or  other  obliga- 
tion, the  right  to  ample  indemnification  from  the  taxpayers 
of  the  future.  Wealth  is  destroyed,  but  property  rights 
and  relations  are  conserved. 

§  533.  The  great  advantage  of  loans  over  taxes  as 
means  of  waging  war  is  that  they  enable  the  government 
to  secure  unequal  contributions  of  capital  from  different 
citizens.  The  guarantee  of  repayment  does  not  lessen  to 
any  material  degree  the  aggregate  amount  of  things 
destroyed ;  but  the  government  can  get  those  things  with 
far  less  ill-will,  because  each  citizen  does  not  suspect  the 
treasury  of  exacting  an  unfairly  large  share  from  him  and 
an  unfairly  small  one  from  his  neighbor.  The  promised 
indemnity  for  the  expense  makes  the  cost  more  easily 
borne.  It  becomes  possible  to  secure  the  aid  of  foreign 
capital  which  could  not  be  obtained  by  taxation.  In  fact, 
the  apparent  lightness  of  the  burden  of  loans  at  the  outset 


DANGERS  OF  EXCESSIVE  BORROWING.  48 1 

of  a  war  as  compared  with  that  of  taxes,  constitutes  one 
of  the  chief  dangers  of  the  system.  The  voluntary  contri- 
butions of  the  sanguine  are  exhausted  at  the  beginning, 
and  the  government  is  then  compelled  to  have  recourse, 
under  most  unfavorable  circumstances,  to  those  who  are 
not  so  well-affected  to  the  national  cause.  If  it  calls  for 
additional  loans,  they  are  negotiated  at  very  high  rates  of 
interest ;  if  new  and  burdensome  taxes  are  imposed,  they 
have  to  be  extorted  from  unwilling  hands  by  a  govern- 
ment whose  powers  are  already  overstrained  by  the  diffi- 
culties of  its  situation.  If  a  nation  goes  into  a  war  with 
its  eyes  open,*  its  statesmen  will  strive  to  impose  the 
maximum  of  taxation  at  the  outset,  and  resort  to  loans 
only  as  the  power  to  bear  new  taxes  becomes  exhausted. 
In  this  way  it  can  command  the  maximum  of  capital, 
both  in  the  form  of  taxes  on  the  unwilling,  and  of  loans 
from  the  willing  ;  while  it  can  obtain  the  borrowed  capital 
at  relatively  low  rates  of  interest,  and  thus  lessen  the 
burden  on  the  future  taxpayer. 

§  534.  In  the  case  of  debts  for  industrial  enterprises 
which  do  not  promise  a  commercial  return,  the  same  rule 
should  be  applied  which  has  been  given  for  war  debts. 
They  should  be  reduced  to  a  minimum  ;  the  only  differ- 
ence being  that  the  extraordinary  expenses  which  these 
enterprises  involve  should  often  be  met  by  increase  of 
cissessments  rather  than  by  increase  of  taxes.  Sewers, 
harbor  improvements,  highways,  and  other  things  which 
cannot  pay  for  themselves  commercially,  i.  e.,  for  whose 
use  the  community  cannot  charge  a  remunerative  price, — 
should  in  general  be  paid  for  by  assessment  or  not  built  at 
all.     This  may  seem  a  hard  rule  ;  in  some  cases  it  really  is. 

*  The  policy  of  the  United  States  Treasury  at  the  opening  of  the  Civil 
War  was  the  reverse  of  this.  It  was  partly  justified,  though  not  wholly  so, 
by  the  fact  that  the  North  did  not  go  into  the  war  with  its  eyes  open  to  the 
cost,  and  would  have  refused  to  make  sacrifices  in  1861  which  it  was  ready 
to  make  two  or  three  years  later. 
3» 


482  GOVERNMENT  REVENUE. 

But  the  enormous  number  of  mistakes  made  in  borrowing 
money  for  things  which  can  not  and  do  not  pay  for  them- 
selves shows  how  unsafe  it  is  for  government  authorities 
to  judge  whether  the  public  necessity  of  such  enterprises 
warrants  putting  heavy  burdens  on  the  future  taxpayer. 

§  535.  Equally  bad  are  the  results  which  arise  from 
borrowing  money  for  enterprises  whose  commercial  profit 
is  speculative.  Loans  in  aid  of  railroads  often  promise  a 
return  both  in  public  convenience  and  in  fiscal  advantage, 
when  in  point  of  fact  the  road  is  so  tardily  completed  as 
to  furnish  neither.  In  so  conservative  a  state  as  Massa- 
chusetts, a  large  part  of  the  municipal  subscriptions  in 
aid  of  railroad  building  have  been  given  to  railroads  that 
either  were  not  built  at  all,  or  did  not  become  available 
for  use  until  many  years  had  elapsed. 

§  536.  The  case  of  loans  for  industrial  improvements 
which  promise  a  sure  return  is  different,  at  least  in  theory. 
Instead  of  raising  as  large  a  part  of  the  expense  as 
possible  by  taxation  it  is  enough  if  we  keep  the  loan 
within  such  limits  that  the  investment  is  sure  to  pay 
interest  and  make  such  slight  annual  contributions  to  the 
payment  of  the  principal  as  are  warranted  by  the  char- 
acter of  the  business.  If  the  original  form  of  the  capital 
is  liable  to  become  antiquated  in  twenty  years'  time,  its 
cost  and  income  should  be  so  adjusted  that  the  current 
returns  will  extinguish  the  principal  within  twenty  years. 
The  agency  by  which  this  gradual  extinction  of  debt  is 
accomplished  is  known  as  a  sinking  fund} 

§  537.  The  attempt  to  apply  the  sinking  fund  system 

•  The  detailed  working  of  various  sinking  fund  systems,  and  the  questions 
involved  in  the  sale  or  purchase  of  bonds  above  par,  belong  to  a  treatise  on 
finance  rather  than  to  one  on  general  economics.  As  a  rule,  it  appears  to 
be  a  wise  provision  for  a  government,  as  well  as  for  a  private  corporation,  to 
insert  in  all  its  bonds  a  clause  stipulating  a  right  to  redeem  them  before 
maturity,  at  a  price  slightly  in  advance  of  their  par  value  ;  say  at  no. 
This  does  not  interfere  with  the  readiness  of  the  public  to  take  the  original 
loan,  and  it  often  greatly  facilitates  the  operation  of  repayment  or  refunding. 


PAYMENT  OF  PUBLIC  DEBTS.  483 

to  war  debts  usually  involves  a  good  deal  of  juggling  with 
figures.  Nor  has  it  any  natural  basis  in  theory.  There 
is  no  definite  time  within  which  a  war  debt  ought  to  be 
repaid,  because  there  is  no  definite  date  at  which  a  nation 
can  expect  another  war.  If  bonds  can  be  placed  on  the 
market  at  a  lower  rate  of  interest  when  they  contain  a 
sinking  fund  provision,  such  a  clause  may  wisely  be  in- 
serted.' But  in  general  the  only  safe  rule  about  a  war 
debt  is  to  pay  it  off  as  fast  as  the  resources  of  the  country 
will  allow.  The  slight  disturbance  to  individual  investors 
is  more  than  made  up  by  the  reserve  strength  which  free- 
dom from  debt  gives  the  government.  Had  the  United 
States,  in  i86i,in  addition  to  its  other  difficulties,  labored 
under  an  inherited  burden  of  old  war  debts,  it  would  have 
been  disastrously  weakened.  Even  in  the  case  of  debts 
for  industrial  improvement  it  would  generally  be  better  if 
provision  were  made  for  paying  them  off  more  rapidly. 
Very  few  improvements  pay  for  themselves  within  the 
time  anticipated.  For  one  case  like  the  Erie  Canal, 
which  did  better  than  its  promoters  expected,  we  have 
a  hundred  cases  which  fail  to  pay  for  themselves  at  all, 
and  which  leave  a  burden  of  interest  with  no  real  increase 
of  the  means  of  repayment.  Witness  the  enormous  in- 
crease of  municipal  indebtedness  in  recent  years,  and  of 
the  burdens  connected  with  it ;  burdens  so  great  as  to 
lead  to  the  enactment  of  arbitrary  provisions  limiting 
the  amount  of  debts  which  municipal  authorities  may 
legally  contract. 

§  538.  It  must  never  be  forgotten  in  matters  of  public 
finance  that  the  treasurers  of  our  nations  and  municipali- 
ties are  dealing  with  government  property  and  not  with 

'  The  use  of  terminable  annuities  by  which  a  man  gives  a  certain  amount 
of  capital  to  the  government  in  consideration  of  receiving  a  determinate 
payment  during  his  lifetime,  combines  the  two  advantages  of  attracting  the 
capital  of  a  certain  class  of  investors,  who  have  no  families  to  provide  for, 
and  of  providing  for  the  gradual  extinction  of  the  obligations  of  the  govern- 
ment by  the  death  of  the  annuitants. 


484  GOVERNMENT  REVENUE. 

public  wealth.  The  fact  that  capital  is  in  the  hands  of 
public  authorities  does  not  necessarily  make  the  national 
wealth  any  greater  than  it  would  be  if  left  in  the  hands  of 
individuals  or  corporations.  Public  authorities  may  do 
some  good  things  which  private  individuals  cannot ;  they 
may  also  do  some  bad  things  which  private  individuals 
can  be  prevented  from  doing.  Unless  fiscal  checks  are 
rigidly  applied  and  fiscal  deficits  made  up  by  present 
taxation  rather  than  by  promises  for  the  future,  the 
danger  of  waste  far  outweighs  the  probability  of  good. 


INDEX. 

The  numbers  refer  to  pages. 


Absentee  ownership,  of  land,  130, 
131  ;  of  railroads,  174 

Abstinence,  268.     See  Saving. 

Accidents,  insurance  against,  59-63; 
liability  for,  350 

Accounts,  income  and  capital,  5  ; 
as  form  of  credit,  234  ;  deprecia- 
tion, 292 

Accumulation,  46,  96  ;  motives  for, 
1 16  ;  excessive,  147  ;  increase  of, 
340,  341 

Acworth,  W.  M.,  151 

Adams,  C.  F.,  151 

Adams,  H.  C,  397 

Administrative  functions  of  govern- 
ment, 392-403 

Ad  valorem  duties,  457 

Advertising,  70,  384 

Advisory  commissions,  177 

Agencies,  irresponsibility,  155,  156  ; 
expense,  385 

Agricultural  labor,  early  history  of, 
35  ;  under  English  poor-law,  54  ; 
advances  to,  57-59  ;  burdens  on, 
367,  368  ;  hours  of,  406,  407 

Agriculture,  development  of,  127, 
128  ;  characteristics,  151,  152 

Allotments,  58,  59 

Altruism,  14 

American  Civil  War,  37,  440,  481. 
See  United  States 

Anarchists,  355 

Annuities,  483 

Appreciation  of  gold,  310-214 


Apprenticeship,  statutes  of,  368 

Arbitrage,  105,  241 

Arbitration  of  labor  disputes,  357- 

362 
Aristotle,  21 

Art  of  political  economy,  2,  12 
Ashley,  W.  J.,  abridgment  of  Smith, 

10  ;  on  English  Economic  History, 

35,  65,  121,  136 
Assessment  of  taxes,  452-457 
Assessments,  447-449,  481,  482 
Associations  of  productive  labor,  58 
Assurance,  contract  of,  137 
Atkinson,  Edward,  40,  339,  341,  385 
Attachment  of  wages,  122, 143 
Australian  gold,  209 
Austria,  workmen  s  insurance  in,  62 
Austrian  school,  80,  93,  274 
d'Avenel,  French  economic  history, 

34.  189 

Bagehot,  Walter,  232. 

Balance  of  trade,  427-429 

Bank,  Banking,  235-259 ;  notes,  192, 

247-259  ;  checks,  193,  241-247  ; 

cooperative,  386-390 
Bank  of  England,  191,  252,  253,  257 
Bank  of  France,  255 
Bank  of  United  States,  255 
Bargaining,  72,  84  ;  between  labor 

and  capital,  366,  367 
Barter,  71,  233 
Bastable,  C.  F.,  447 
Bastiat,  F.,  15  ;  on  interest,  137 
485 


486 


INDEX. 


Bentbam,  Jeremy,  i6 

Bill  broker,  244 

Bill  of  excbange,  239-244 

Bimetallism,  208-224 

Birth  rate,  42,  43 

Bland  Act,  222 

Boebm-Bawerk,  E.  v.,  on  capital  and 

interest,  264,  269,  274 
Bonar,  J.,  on  Malthus,  26 
Borrowed    capital,    speculation   on, 

112 
Bottomry,  280 
Bounties,    135,    424 ;    to    shipping, 

442.  443 
Boycott,  359,  360 
Brassage  y  187 
Brassey,  T.,  on  wages,  303 
Brentano,  352 
Briggs  collieries,  374 
Budget,  449,  478 
Building  societies,  387-390 
Bullion  certificates,  191 
Bureaus  of  information  to  labor,  59 
Bye-products,  8g 

Caimes,  J.  E.,  64  ;  on  demand,  74, 

79,  332 

California,  currency  in  civil  war, 
189  ;  gold,  209,  219 

Canada,  banking  in,  254 

Canals,  394-396 

Capital,  contrasted  witb  income,  5, 
27  ;  different  meanings,  6,  7,  312, 
313  ;  origin  of,  30  :  as  a  preven- 
tive check  to  population,  49,  50  ; 
needed  for  legitimate  speculation, 
HI  ;  merits  and  defects  of  sys- 
tem, 118-120;  investment  of,  121- 
150;  fixed,  125,151;  combination 
of,. 1 51-179  ;  money  as,  181  ;  and 
interest,  264-281;  effect  on  wages, 
311-318  ;  conflicts  with  labor,  336 
-369  ;  taxation  of,  463-464 

Capital  account,  5 

Capital  goods,  7 


Capitalization,  138 

Carey,  H.  C,  on  rent,  293 

Carrying  trade,  441-443 

Centralized  banking,  251 

Certainty  in  taxation,  451 

Charity,  51-57 

Cheap  labor,  328-333 

Checks  to  population,  41-51 

Checks  (bank),  193,  241-247 

Chevalier,  M.,  422 

Children,  employment  of,  345-349, 
405,  409,  410 

Chinese  immigration,  420,  421 

Circulation,  192-197,  296 

Cities,  growth  of,  337,  407  ;  death 
rate,  347  ;  taxation  of  real  estate 
in,  473,  474 

Civil  service  reform,  402 

Clark,  J,  B.,  on  capital,  7  ;  on  im- 
puted value,  274 

Clearing  house,  235-237,  257,  258  ; 
railway,  158 

Coal  trade,  344 

Cobden,  Richard,  422 

Cohn,  G.,  on  railroads,  151  ;  on 
finance,  447 

Coin  certificates,  191,  259 

Coinage,  185  ;  free,  186 

Colbert,  450 

Collectivism,  355 

Colonization,  445,  446 

Combination,  73,  85,  86,  90  ;  of 
speculators,  107,  108  ;  of  capital, 
1 51-179  ;  commercial  and  indus- 
trial, 159;  of  labor,  352;  laws 
against,  352-354  ;  international, 
438 

Comfort,  standard  of,  48 

Commerce,  65,  427 

Commercial  competition,  87 

Commercial  paper,  243,  244 

Commercial  crises,  295-299.  See 
Crises. 

Commissions  of  experts,  177,  362 

Communists,  355 


INDEX. 


487 


Commutation,  of  labor  dues,  35  ;  of 

profits,  269-271 
Compensation,  149 
Competition,  73—96 ;  commercial  and 

industrial,  87  ;  of  capital,  117, 118, 

264-266  ;  in  large  industries,  152, 

156,  161,   162  ;  of  laborers,  364- 

368,  412  ;  international,  430-432  ; 

effect  on  incidence  of  taxes,  461, 

467-469 
Comte,  Auguste,  18 
Conciliation,  361,  362 
Confiscation,  477 

Conservatism,  necessity  for,  32,  33 
Consolidation,  158,  159 
Consumers'  cooperation,  382-389 
Consumers'  surplus,  90,  91,  266 
Consumption,  318-335  ;  diversified, 

66,    334 ;    intelligent,    70,    335  ; 

effect  on  demand,  79  ;  affected  by 

tariff,  438,  439 
Consumption  loans,  270 
Contract  labor,  411  ;   convict,  413- 

417  ;  foreign,  417,  418 
Contracts,  for  future  delivery,  108, 

160  ;  standard  of,  181 
Control  of  capital,  117,  269,  270 
Convict  labor,  413-417 
Cooperation,  379-390 
Copper  syndicate,  85,  163,  164 
Copper  tariff,  436 
Copyright,  134,  135  ;  international, 

444 
Com  rent,  182 
Comers,  107,  160 
Corporations,  143-146 ;  taxation  of, 

454,  462,  475 
Cossa,  L.,  I 
Cost,  of  labor,  307  -304  ;  of  services, 

305 
Cost  of  production,    123,   86,    94  ; 

difficulty  of  ascertaining,  169,  436; 

of  precious  metals,  184,  211 
Credit,  181,  232-263  ;    advances  to 

laborers,  56,  58,  381,  382 


Creditors,  206-213,  227-230 

Criminal  classes,  48,  51 

Crisis,   Crises,   214,   250,  252,   258, 

295-299.  343-345 
Currency,   193 ;    and  interest,  277, 

278 
Current  expenses,  153,  154 
Custom  and  prices,  65,  69,  70,  73, 

83-85  ;  and  wages,  307,  331 
Customs  duties,  422-441,  457 

Dabney,  W.  D.,  151 

Darwin,  18,  19 

Death  rate,  42,  43 

Debasement,  188 

Debtors,  206-213,  227-230 

Debts,    foreign,   426  ;    in   taxation, 

453,  454  ;  public,  478-484 
Deduction,  deductive  methods,  23- 

25 
Degeneration,  22,  46 
Demand,   74-80,  87  ;  curve  of,  77, 

88,  326  ;  reciprocal,  79,  332  ;  for 

labor,  308-320 
Demonetization  of  silver,  217,  220, 

221,  226 
Density  of  population,  43,  45 
Dependent  classes,  51 
Deposits,  244-248 

Depreciation  account,   170;   depre- 
ciation of  money,  190,  210-214 ; 

of  capital,  292 
Depression  of  trade,  295-299.     See        0 
.  Crisis 

Desire  and  demand,  75,  79 
Destruction  of  wealth,  31,  308-310 
Deterioration,  80,  81 
Differential  gain,  285-291,  304,  468, 

469 
Differential  rates,  157 
Diminishing  return,  law  of,  43,  154. 

155 
Direct  expense,  173 
Direct  taxes,  459-475 
Directors'  responsibility,  178,  179 


488 


INDEX. 


Discount,  244,  246  ;  of  product  by 

capitalist,  274,  301 
Discriminating  rates,  155,  156,  159, 

178 
Disutility,  123 

Distribution.      See   Profits,   Trans- 
portation, Wages 
Diversification  of  industry,  433 
Dividends,  limitation  of,  166-168 
Division  of  labor,  66,  350,  351 
Division  of  traffic,  156-158 
Dollar,  220,  221 
Domestic  economy,   44  ;    domestic 

system  of  industry,  357,  413 
Domestic  exchange,  237,  238 
Domestication  of  animals,  27 
Domination  substituted  for  annihila- 
tion, 20,  21,  31,  32 
Donisthorpe,  W.,  I 
Doses  of  capital,  274,  275 
Double  taxation,  451 
Drage,  G.,  on  the  unemployed,  26 
Dunbar,  C.  F. ,  on  banking,  232 
Duration  of  labor  power,  302 
Duties  on  imports,  422-441,  457 
Dynamic  conceptions  and  problems, 
5,  23,  24 

Earnings,  gross  and  net,  456 
Economic  history,  24 
Economic  man,  16 
Economics,   origin  of,    2  ;    general 
Ij^  history  of,  8-18  ;  use  of  term,  12, 

13 ;  methods,  23-25 
Economist,  index  numbers,  194 
Economy  of  consumption,  328,  329 
Education,  69,  334,  335 
Effertz,  O.,  31 
Eflficiency  and  wages,  303,  328,  329, 

365 
Egoism,  14 

Eight-hour  movement,  405-409 
Elasticity  of  currency,  245 
Electricity,  170,  171 
Ely,  R.  T.,  on  labor,  336 


Emancipation,  35-40 

Emergency  relief,  55,  56 

Eminent  domain,  149 

Emotion  in  economics,  17,  49 

Employers'  liability,  350 

Enclosures,  3 

Engel's  law,  325 

England,  poor  relief  in,  51,  53-55  ; 
speculation  in,  no;  limited  lia- 
bility in,  145  ;  directors'  responsi- 
bility in,  178,  179  ;  mint,  186  ; 
Bank  of,  191,  252,  253,  257  ; 
factory  legislation,  349,  350;  labor 
organization,  352-356  ;  coopera- 
tion, 383  ;  tariff  policy,  422,  423  ; 
shipping,  441-443;  colonial  policy, 

445,  446 
Equality,  social,  41 
Equality  in  taxation,  451,  465 
Equalization  of  supply,  106 
Equation   of   supply  and    demand, 

76,  265  ;  of  labor,  306 
Escheat,  478 
Ethical  selection,  49 
Ethics  and  economics,  18-25,  91-96, 

120 
Exchange,  of  goods  and  services,  70 

-96  ;  domestic  and  foreign,  237- 

241 
Excise,  475,  476 
Exemptions    from      taxation,    465, 

466 
Exhaustion  of  soil,  433,  436 
Expenditure  and  wages,  308-310 
Expense  of  production,  88 
Export  dues,  476 
Exports,  424-427 
Expropriation,  149 

Fabian  Society,  i,  409 
Factory  acts,  17,  69,  349,  350 
Factory  insurance,  60-62,  385,  386 
Factory  system,  336-363 
Falkner,  R.  P.,  194 
Familistere,  372 


INDEX. 


489 


Family  property,  32  ;  family  respon- 
sibility, 44-51 

Famine,  39,  40,  46 

Farrer,  T.  H.,  151,  167 

Fanners'  Alliance,  262 

Farms,  value  of,  293 

Fawcett,  H.,  on  pauperism,  26 

Fees,  121,  447-449 

Feudal  system,  29,  34,  64,  127 

Final  utility,  79 

Fines,  477 

Fire  insurance,  99;  coSperative,  385, 
386 

Fisher,  Irving,  5 

Fixed   capital,   125,   152-155,   291- 

295.  345 
Food,   as  a  measure  of  wealth,  9  ; 

supply  of,  43-45 
Foreign  exchange,  238-241 
Foreign  trade,  427-429,  441-443 
Forests,  131,  394,  436 
Forfeitures,  477 
Fractional  currency,  188 
France,  and  the  Malthusian  theory, 

50  ;  railroad  system  of,  162,  168  ; 

mint,    186  ;  bimetallism  in,  219, 

220  ;  Bank  of,  254  ;  assignats  in, 

262;  courts  of  conciliation  in,  362; 

cooperation  in,  379  ;  tariff  policy, 

422,  423  ;  shipping,  443 
Franchise  tax,  475 
Free   coinage,  186  ;  of  silver,  219- 

221,  224-226 
Free  communities,  28,  29 
Freedom,  22 
Free  labor,  37,  44 
Free  trade,  66,  422,  4?^,  431 
Freights,  ocean,  429 
Friendly  societies,  61,  386 
Funding,  478 
Futures,  108 

Gain-sharing,  378 
Gambling,  97,  98,  106-108 
Gas  works,  154,  170 


George,  Henry,  on  Malthus  45  ;  on 
capital  113,  114,  137  ;  on  land 
ownership,  150,  288,  292  ;  single- 
tax  theory,  468-473 

Germany,  workmen's  insurance  in, 
60-62  ;  usury  laws  of,  140  ;  rail- 
road advisory  boards,  177  ;  bank- 
ing in,  254,  255  ;  state  railroad 
management  in,  400,  401  ;  tariff 
policy,  423 

Giddings,  F.   H.,  on  sociology,  26 

Gide,  C.,  424 

Gilbert's  Act,  54 

Gilds,  352,  367,  379 

Gilman,  N.  P.,  370 

Goethe  on  human  evolution,  22 

Gold,  stock  of,  183  ;  standard,  190  ; 
scarcity  of,  204,  224 

"Gold  and  Silver  Commission," 
208 

Gold  speculation,  109 

Goschen,  G.  J.,  232 

Government,  management  of  indus- 
try by,  390-403;  historic  functions 
o^  391-393  ;  revenue  of,  447-484 

Government  insurance,  61 

Government  notes,  259-263 

Great  Britain.     See  England, 

Gresham's  Law,  189,  218 

Ground  rent,  287 

Groups,  as  units  of  natural  selection, 
19-22  ;  non-competing,  330-332 

Gnnton,  G,,  434 

Hamilton,  Alexander,  242 

Hawley,  F.  B.,  342 

Health,  public,  67 

Hegel,  influence  of,  18 

Heredity,  19 

Historical  method.  Historical  school, 

23-25 
Hobson,  J.  A.,  336 
Holyoake,  G.  J.,  370 
Home  market,  428-430 
Homes  of  operatives,  68,  347 


490 


INDEX. 


Hours  of  labor,  320-325  ;  voluntary 
reduction,  327  ;  movements  for 
forced  reduction,  343,  349,  403- 
410 

Housing  of  poor,  67,  68 

Howell,  G.,  on  labor,  336 

Human  evolution  distinguished  from 
animal,  21 

Hunting  stage,  26,  27,  45 

Immigration,  330,  331,  405,  417- 
422 

Imports,  424-427 

Imprisonment  for  debt,  143 

Improvements,  effect  of,  4  ;  public, 
481-484 

Imputed  value,  274,  275 

Incidence  of  taxation,  458-461 

Income  account,  6 

Income  contrasted  with  capital,  5, 
340,  341 

Income  tax,  463-467 

Increasing  return,  154,  155 

Index  numbers,  193-195 

Indirect  taxes,  459-463,  477-479 

Individual  wealth,  3,  4 

Individualism,  14,  17,  18,  22,  165 

Industrial  competition,  87  ;  indus- 
trial speculation,  11 2-1 20 

Inequality  of  conditions,  41,  94,  329 

Infanticide,  46 

Infant  industry,  433-440 

Inflation,  190,  228-231  ;  bank-note, 
249,  250 

Inheritance  tax,  474 

Insurance,  99,  roo ;  of  workmen, 
60-63  ;  and  business  profits,  288, 
289  ;  manufacturers',  349,  385  ; 
cooperative,  385,  386 

Intellectual  morality,  49 

Interest,  267-281;  what  it  measures, 
6  ;  system  of,  136-143  ;  on  short- 
time  paper,  200,  201 ;  and  cur- 
rency, 212 

Internal  revenue,  475,  476 


Interstate  Commerce  Commission, 
177  ;  Interstate  Commerce  Law, 
178 

Investment  of  capital,  121-150 

Ireland,  rents  in,  131 

Iron  trade,  344 

Irredeemable  paper,  192,  229-231 

Irregularity  of  employment,  302 

Irrigation,  394 

Italian  railroad  commission,  402 

Jevons,  W.  S.,  on  utility,  64,  80; 
on  money,  180  ;  on  labor,  332, 
336,  360  ;  on  government  owner- 
ship of  monopolies,  397-399 

Joint  cost,  89,  171-T73 

Joint-stock  companies,  143-146 

Judicial  rent,  131 

Keynes,  J.  N.,  i 

Knies,  K.,  5 

Knights  of  Labor,  355,  359,  360 

Labor,  origin  of,  27,  28  ;  of  slaves, 
28-30  ;  relation  to  property,  30, 
34;  emancipation  of,  35-40;  right 
to,  54  ;  public  employment  for, 
56~59  »  colonies,  58  ;  division  of, 
66,  329-331.  350.  351  ;  combina- 
tion of,  160,  352  ;  price  of,  213  ; 
remuneration  of,  301-333;  de- 
mand for,  308-320  ;  variation  in 
character,  326-333  ;  and  machin- 
ery, 336-369;  organization,  352- 
369  ;  legislation,  349,  350,  404- 
440 

Laborers,  advances  of  state  credit 
to,  58,  381,  382 

Labor-saving  machinery,  338,  339 

Laissez  faire,  12 

Land,  improvement,  57;  tenure,  127- 
133  ;  speculation,  132  ;  grants  of 
public,  135,  136  ;  taxation,  453, 
454,  471,  472;  nationalization, 
468-474 


INDEX. 


491 


Lassalle,  F.,  58,  381,  382 

Latin  Union,  2ig,  220     . 

Laughlin,  J.  L.,  180 

Law,  meaning  of,   13  ;  respect  for, 

33 

Law  of  diminishing  return,  of  popu- 
lation, etc.  See  Diminishing  re- 
turn, Population,  etc. 

Leclaire,  373 

Legal  tender,  185,  262 

Legislative  fixing  of  rates,  84,  85, 
168,  173-175 

Legitimate  speculation,  100-106, 120 

Leisure,  321 

Leroy-Beaulieu,  447 

Levi,  Leone,  404 

Liability  of  employer,  350 

Liberty,  11,  14,  22 

Life  insurance,  99,  138,  139,  386 

Limited  liability,  143-146 

Liquor  traffic,  67,  334,  335 

List,  F.,  434 

Living  wage,  363-366 

Loan  associations,  387—390 

Loans,  136-143,  269-274;  industrial, 
229,  230  ;  of  banks,  243,  244  ; 
government,  478-484 

Local  banks,  250,  251 

Local  discrimination,  178 

Local  taxation,  462 

Localization  of  poverty,  32,  49 

London,  a  clearing  house  for  inter- 
national trade,  241 

Longe,  on  wages,  316 

Loria,  on  social  evolution,  26 

Losses  on  fixed  capital,  288-299 

Luxury,  333,  334 

Machinery,  over-production  of,  147  ; 

effect  on  interest,  279  ;  effect  on 

labor,  336-369 
MacCulloch  on  capital  and  wages, 

313.  315 
MacLeod,  H.  D.,  232,  242 
Maintenance  account,  174,  292 


Malthus,  Essay  on  Population,  41 

Malthusian  theory,  41-51 

Man,  struggle  for  existence  in,  19- 

23 

Management,  earnings  of,  267,  268 

Manor,  64,  65 

Manufacturers'  insurance,  385,  386 

Margin  of  cultivation,  305 

Marginal  utility,  79  ;  marginal  units 
of  labor  and  capital,  274,  275,  289 

Margins,  107,  no 

Market,  74,  428-430  ;  economy  of 
large,  127 

Market  price,  75-87 

Marriage  as  preventive  check  to 
population,  50 

Marshall,  Alfred,  on  price,  64  ;  on 
monopoly,  151 

Marx,  Karl,  on  capital,  7,  I2I  ;  on 
value,  95,  343;  on  profits,  288  ;  on 
hours  of  labor,  343 

Massachusetts,  limited  liability  in, 
145  ;  railroad  commission,  177  ; 
state  bank-note  issues,  255  ;  fac- 
tory legislation,  349,  350,  408 

Matriarchate,  46 

Mayo-Smith,  R.,  on  emigration,  404 

Mechanics'  lien,  122 

Mediaeval  Europe,  economic  changes 
in,  34-36  ;  labor  in,  307 

Medium  of  exchange,  181 

Menger,  C,  on  money,  182  ;  on  im- 
puted value,  274,  332 

Mercantile  system,  8,  9,  423—426 

Merchant  marine,  441-445 

Metallic  money,  1S3 

Metayers,  36,  131 

Methods  of  enquiry,  23-25 

Migration,  417-422 

Military  government,  401 

Military  necessity,  36 ;  arguments 
for  protective  tariff,  440 

Mill,  J.  S. ,  on  liberty,  11  ;  on  joint 
cost,  89  ;  on  money,  180  ;  on 
credit  and  prices,  246  ;  on  wages, 


492 


INDEX, 


316 ;  on  international  demand, 
332  ;  on  land  nationalization,  473 

Mining  claims,  128,  129 

Mint,  186 

Money,  180-231  ;  no  measure  of 
public  wealth,  3,  8,  9 ;  character- 
istics, 71  ;  of  account,  iSi  ;  paper, 
190  ;  value  of,  193 ;  eflforts  to 
economize,  232-234  ;  accumula- 
tion of,  425 

Money  lenders,  39 

Monometallism,  211-224 

Monopoly,  73,  84,  83  ;  legislative 
grants  of,  133-135  ;  of  combined 
capital,  159-164  ;  effect  on  theory 
of  profits,  285  ;  of  labor,  367, 
368  ;  in  hands  of  government, 
396-403  ;  effect  on  prices,  448  ; 
taxation  of,  467-474 

Morley,  John,  on  compromise,  11 

MQhlhausen,  operatives'  dwellings 
in,  68 

Municipal  insurance,  386  ;  manage- 
ment of  industry,  402 

Napoleon  III.,  422,  444 

National  banks  of  the  United  States, 

256-257 
National  income,  wealth,  etc.      See 

Public  income,  wealth,  etc. 
Nationalists,  355 
Nationalization  of  property,  5,  393- 

403 

Natural  law,  13 

Natural  rights,  148 

Natural  selection,  19,  51  ;  of  capi- 
talists, 115,  119,  361 

Natural  value,  148 

Navigation  acts,  441 

Negative  rent  and  profit,  288-298 

Negro,  37,  38 

Net  profit,  267,  285-291,  456 

Newcomb,  S.,  on  capital,  5  ;  on  in- 
dustrial circulation,  296 

New  countries,  profits  in,  281-283 


Newmarch,  \V.,  232 

New  unionism,  355,  356 

New   York   Clearing   House,   237 ; 

loan  certificates,  257 
New  York  State  banking  law,  255 
Nicholson,  J,  S.,  180 
Nihilists,  355 
Nitti,  on  Malthus,  48 
Nominal  wages,  123,  301,  302,  309- 

311,425 
Non-competing  groups,  330-333 
Normal  price,  87-91,  93  ;  of  gold, 

202-206 

Occupancy,  30 

Occupations,  choice  of,  95,  330-332  ; 

taxes  on,  474,  475 
Organization  of  labor,  352-369 
Organized  charities,  55,  56 
Overcrowding,  63 
Over-production,  294-296,  344,  345 

439 
Oyster-beds,  property  in,  129,  130 

Pain  of  labor,  322,  323 

Palgrave  on  prices,  194 

Panics,  295-299.     See  Crises. 

Paper  money,  190,  229-231,  262,  263 

de  Parieu,  E.,  447 

Partnership,  144 

Pastoral  stage,  26-28 

Patents,  133,  134 

Paternalism,  12  ;  of  employers,  372 

Patten,  S.  N.,  on  consumption,  70, 
322,  323  ;  on  rent,  293  ;  on  pro- 
tection, 439 

Pauper,  Pauperism,  48,  51-56  ;  im- 
migration, 418,  419 

Peasants,  307 

Peel,  Robert,  Bank  Act,  252,  253, 
257  ;  corn  law  repeal,  422 

Pensions,  62,  63,  395 

Physiocrats,  9 

Piece-work,  Piece-wage,  301-304, 
316,317 


INDEX. 


493 


Place  value,  loo 

Pleasure  and  pain,  balance  of,  322, 
323 

Political  corruption  and  tariff,  440 

Political  economy,  art  of,  2,  12,  13 

Political  money,  230 

Poll  tax,  474 

Pools,  156-158 

Poor-law,  English,  53-55 

Poor  relief,  53-58 

Population,  theory  of,  41—51  ;'  move- 
ments of,  57,  337,  407,  417-422 

Possession  and  property,  30,  31 

Poverty,  39-63,  330-335 

Preventive  checks  to  population,  42, 
48-50 

Price,  70,  72-96  ;  general  level  of, 
193-198,   246,    249 ;  public,  447- 

449 
Prison  labor,  413-417 
Private  wealth,  3,  4,   10,   11.      See 

Property 
Producers'  cooperation,  379-382 
Producers'  surplus,  90,  91 
Production,    cost    of,    123  ;   process 

of  125-136 
Professional  charges,  84,  364,  365 
Profits,  124,  264-300  ;  justification 

of,    II,    288  ;  in  trade,  103-105  ; 

limitation   of,  by  law,    166-168  ; 

net,  267,  285-291  ;  fall  in,  339-342 
Profit-sharing,  373-378 
Progress,  effect  on  investments,  292, 

293 
Progressive  taxation,  465,  466 
Prohibition  of  liquor  traffic,  67 
Property,  2-4  ;  origin  of,  30-32  ;  in 

land,    127-133 ;    corporate,    143- 

146  ;  limitations  on,  148-150 ;  gov- 
ernment, 393-403 
Property  tax,  463-465 
Protection,  135,  422-441,  477 
Proudhon,  P.  J.,  15 
Prussian  railroads,  400,  401 
Public  health,  67 


Public  income,  4-8 

Public  land  policy,  135,  136,  448 

Public  policy  and  gambling,  98 

Public  property,  4 

Public  schools,  67,  334,  335 

Public  wealth,  2,  3,  7,  8 

Public  works,  56-58,  393-396,  481- 

484 
Publicity,  176-179,  348 

Quantity-theory  of  money,  197,  246, 
247 

Rae,  John,  i,  40,  342  ;  on  hours  of 
labor,  404 

Railroads,  154-158,  162,  171-179  ; 
relations  to  labor,  357  ;  govern- 
ment ownership,  398-400 

Rates,  regulation  of,  173-175 

Real  estate  as  public  wealth,  3,  4  ; 
as  property,  127-133  ;  losses  on, 
269-274  ;  taxation,  453,  468-473 

Real  wages,  123,  301,  302,  309-311 

Reciprocity,  444 

Recoinage,  185 

Redeemable  paper,  191 

Refunding,  477 

Rent,  in  mediaeval  history,  35  ; 
economic,  88,  267,  285-291  ;  and 
tariff,  434,  436  ;  taxation  of,  468- 
473  ;  relation  to  price  of  products, 
470 

Rent  charges,  purchase  of,  137 

Reserves,  181,  198-201  ;  of  banks, 
241-243,  249 

Residual  theory  of  wages,  317-320 

Retail  markets,  74 

Revenue,  public,  447-484 

Ricardo,  D.,  on  money,  232  ;  on 
rent,  287  ;  on  wages,  315,  316 

Ricca-Salemo  on  interest,  286 

Risk,  compensation  for,  97-100 ; 
botia  fide.  III  ;  in  productive  in- 
dustry, 115-116  ;  relation  to  inter, 
est,  279-283 


494 


INDEX. 


Roads,  394 

Rochdale  pioneers,  383 
Rogers,  J.  E.  Thorold,  406 
Rome,  economic  conditions  in,  33 
Russia,    emancipation    in,    36-39  ; 
usury  in,    140 ;   coinage   of   pla- 
tinum in,  184 

Safety-fund  system,  255 
Salaries,  1 21 

Sanitary  regulations,  67,  413 
Saving,  motives  for,  138  ;  excess  of, 

147  ;  and  taxation,  463,  464 
Savings  banks,  138,  139,  242 
Schoenberg,  "  Handbuch,"  447 
Schoenhof,  J.,  on  wages,  303 
Schloss,  D.  F.,  370,  378,  382 
Schulze-Delitzsch,  387 
Schulze-Gaevernitz,  303,  336 
Scotland,  banking  in,  253,  254 
Security  and  interest,  279-283 
Seigniorage,  187 
Seligman,  E.  R.,  447-449 
Sensitive  commodities,  327 
Sentiment,   in    economics,  17,    18  ; 

effect  on  prices,  73,  74 
Serfdom,  29,  34 
Services,  included  in  wealth,  342  ; 

price  of,  431 
Settlement,  Acts  of,  53,  418 
Share  rents,  35 
Shaw.  G.  B.,  I 
Shearman  on  taxation,  287 
Sherman  act,  222,  223 
Shifting  of  taxes,  458-461 
Shipping,  441-443 
Short  hours,  405-409 
Short-time  loans,  200,  201 
Silver  in  United  States,  190,  219- 

233  ;  certificates,    191  ;  ratio    to 

gold,  etc.,  208-224 
Single  tax,  468-474 
Sinking  fund,  482,  483 
Slavery,   relation  to  public  wealth, 

3  ;  history  of,  27-39 


Sliding  scale,  363,  364 

Smart,  W.,  363,  410 

Smith,  Adam,  general  work,  10  ;  on 

corn  rents,    182  ;    on  protection, 

404  ;  canons  of  taxation,  450,  451; 

on  direct  taxes,  460 
Social  democrats,  355 
Social  standards,  48,  49,  69 
Socialism,  16-18,  22,  165,  355,  387 
Socialistic  theory  of  value,  93-96  ; 

of  wages,  308 
Soetbeer,  A.,  194 
Southern  States,  slavery  in,  37,  38, 

64 
Specialization,  350,  351 
Specific  duties,  437,  457 
Speculation,  100-120,  123  ;  in  land, 

132,  471,  472  ;  effect  of  inflation 

on,  231 
Speculator,  80 
Speed  of  work,  407,  408 
Spencer,  H.,  The  Man  versus  The 

State,  18 
Standard  of  life,  48,  69,  305,  306 
Standard  of  value,  205-223 
Standard  Oil  Company,  160,  163 
State,  its  relation  to  industry,  11,  12, 

390-403 
State  credit,  58,  381,  382 
Static  conceptions  and  problems,  5, 

23,  24 
Statistics,  science  of,  13 
Steel  rails,  437 
Stock  watering,  168 
Stoppage  at  source,  455 
Street  railroads,  173 
Strikes,  352-357 
Struggle  for  existence,  19-23 
Subcontractor,  411-413 
Suffolk  system,  255 
Subjective  value,  91 
Subsidiary  coin,  188,  224 
Subsidies,  135,  442,  443 
Sumner,  W.  G.,  I  , 

Sumptuary  laws,  66  } 


INDEX. 


495 


Supply,  74.  87 

Surplus  value,  Marx's  theory,  343 

Survival,  18-23 

Sweating  system,  411-413 

Switzerland,  taxation  in,  466 

Symmetallism,  225 

Tabular  standard,  207  ^ 

Tariff,  customs,  135,  422-441,  457 

Taussig,  F.  W.,  on  silver,  224  ;  on 
wages,  301  ;  on  tariff  history,  404 

Taxation,  Taxes,  447-484  ;  of  unim- 
proved land,  132  ;  exemptions 
from,  135,  453,  454,  465,  466  ;  in 
railroad  rates,  173 

Telegraph,  154,  170 

Telephone,  170,  171 

Tenant  farms,  130,  131 

Tenement  houses,  67,  68 

Thornton,  on  labor,  316 

Time  value,  loi,  105 

Time-wages,  302-304 

Tolls,  172 

Tooke,  Thomas,  232 

Total  utility,  79 

Towns,  free,  34 

Trade,  ethics  of,  10,  11,  94 

Trade  option,  409 

Trades  unions,  24,  352-369 

Transportation,  104,  126,  154,  171- 
179.  337.  338;  canal,  394-396; 
railroad,  399-400 

Treasury  notes,  260-262  ;  United 
States,  222,  223 

Truck,  122 

Trust  funds,  taxation  of,  452 

Trusts,  158 

Under-consumption,  147,  148 

Unemployment,  405,  406 

Unions  of  labor,  352-369 

United  States,  conditions  affecting 
population,  45,  50 ;  public  land 
grants,  135,  136  ;  lack  of  directors' 
responsibility  in,  178, 179  ;  Treas- 


ury Department  reports,  180 ;  gold 
contracts  in,  182  ;  mint,  186  ; 
currency  conditions,  190,  191  ; 
Senate  Committee  on  Wages  and 
Prices,  194  ;  silver  coinage  in, 
220-223 ;  currency  in  Civil  War, 
228,  229  ;  banks,  251  ;  national 
banking  law,  243,  256,  257,  261, 
262  ;  railroad  profits  in,  281,  282 ; 
labor  movements  in,  353-355  ; 
cooperation  in  380,  384  ;  govern- 
ment ownership  of  monopolies, 
400-402  ;  laws  restricting  immi- 
gration, 419,  420  ;  tariff  policy, 
422,  423,  435-438  ;  shipping,  440, 
442,  443  ;  reciprocity,  444  ;  land 
policy,  448  ;  war  loans,  481 
Usage  as  basis  of  right,  33 
Usury,  Usury  laws,  139-143,  230 
Utility,  78  ;  marginal,  79  ;  of  suc- 
cessive portions  of  income,  97-99, 
322  ;  marginal,  of  gold,  198-205 

Valuation  of  taxable  property,  452- 

457 
Value,  91-96 ;  imputed,  274,  275 
Villeins,  29-34 
Volume  of  business,  196 

Wage-fund  theory,  311-315 

Wages,  1 21-124,  301-335  ;  nominal, 

231,  301,  302,  425  ;  in  commercial 

crises,  298,  299  ;  real,  301,  302  ; 

and  profits,  339-342  ;  and  tariff, 

425-431 
Wagner,   A.,  on  economic  history, 

26  ;  on  finance,  447  ;  on  city  real 

estate,  473 
Walker,  F.  A.,   on   paper  money, 

231  ;    on    prices,    246,    247 ;    on 

wages,  301,  316,  317 
Walras,  L.,  79,  332 
Wants,  satiation  of,  324 
War,    effect    on    institutions,     36  ; 


496 


INDEX. 


currency  in,  261  ;  and  tariff,  440  ; 
loans,  480-482 

Waste,  123 

Water  in  stock,  168 

Waterworks,  154,  170 

Wealth,  different  modes  of  measur- 
ing, I-IO 

"Wealth  of  Nations,"  10,  13 

Webb,  Sidney  and  Beatrice,  336, 
363 

Weber's  law,  78,  324,  325 

Webster,  Daniel,  on  balance  of 
trade,  437 


Weissmann  on  heredity,  19 
Wells,  D.  A.,  447 
Wheat  as  basis  of  contracts,  182 
White,  H.,  on  money  180  ;  on  clear- 

ing-house  loan  certificates,  257 
Wholesale  markets,  74 
Wieser,   F.   v.,   on  value,   64  ;   on 

interest  and  wages,  274 
Women's  work,  345-349,  410,  411 
Workhouse  test,  53-55 
Workingmen,  condition  of,  320-352. 

See  Labor. 
Wright,  C.  D.,  347.  348 


Fields, 
Factories,  and  Workshops 

or 

Industry  Combined  with  Agriculture,  and 
Brain  Work  with  Manual  Work 

By  PRINCE  KROPOTKIN 

New  Edition,  i6°      .      .      .      90  cents  net 


"  Prince  Kropotkin  possesses  the  general  scientific  temper.  .  .  . 
He  seems  to  have  been  everywhere  and  to  have  read  everything 
so  that  his  observations  have  certainly  been  widely  extended.  .  .  . 
A  book  that  should  set  people  thinking  and  should  lead  them  to 
try  by  practical  experience  to  lessen  soma  of  the  acknowledged 
evils  of  the  present  system." — The  Times,  London. 

"  Our  readers  are  recommended  to  read  carefully  Kropotkin's 
survey  of  manufacturing  progress  in  foreign  countries.  .  .  .  This 
is  clear  and  concise  and  presents  just  the  kind  of  summary  re- 
quired by  those  who,  without  time  for  intricate  details,  must  rest 
content  with  a  general  statement  of  the  world's  industrial  move- 
ment. Particularly  interesting  is  the  description  of  the  wonder- 
ful advance  now  being  made  in  agricultural  methods.  .  .  .  The 
book  is  a  most  valuable  contribution  to  the  discussion  of  a  prob- 
lem of  national  and  of  world-viride  importance."  —  The  Daily 
News,  London. 

"  A  book  which  is  an  admirable  example  of  its  author's  lucid- 
ity of  style  and  of  his  capacity  for  making  vital  with  human 
interest  dry  statistical  and  industrial  facts.  ...  A  work  that 
presents  a  new  outlook  in  social  economics  and  is  at  the  same 
time  most  forcible  in  its  demonstration  of  fact." — London  West- 
minster Gazette. 


G.  P.  PUTNAM'S  SONS 

New  York.  London 


Economics. 

Hadley's  Economics. 

An  Account  of  the  Relations  between  Private  Property 
and  Public  Welfare.  By  Arthur  Twining  Had- 
LEY,  Professor  of  Political  Economy,  in  Yale  Uni- 
versity.    8°,  $2.50  net. 

The  work  is  now  used  in  classes  in  Yale,  Princeton,  Harvard,  Amherst,  Dart- 
mouth, Bowdoin,  Vanderbilt,  Bucknell,  Bates,  Leland  Stanford,  University  of 
Oregon,  University  of  California,  etc. 

"  The  author  has  done  his  work  splendidly.  He  is  clear,  precise,^  and 
thorough.  ...  No  other  book  has  given  an  equally  compact  and  intelligent 
interpretation." — American  Journai  0/ Sociology, 

The  Bargain  Theory  of  Wages. 

By  John  Davidson,  M.A.,  D  Phil.  (Edin.),  Professor  of 
Political  Economy  in  the  University  of  New  Bruns- 
wick.    i2mo,  $1.50. 

A  Critical  Development  from  the  Historic  Theories,  together  with  an  examin- 
ation of  Certain  Wages_  Factors :  the  Mobility  of  Labor,  Trades  Unionism,  and 
the  Methods  of  Industrial  Remuneration. 

"  This  able  volume  is  the  most  satisfactory  work  on  Distribution  that  has  yet 
appeared.  Prof.  Davidson's  theory  appeals  to  our  common  sense  as  in  harmony 
with  actual  conditions,  and  he  has  worked  it  out  with  convincing  logic  in  accord- 
ance with  the  principles  of  economic  science.  We  recommend  itaTl  students  of 
economics  as  the  most  important  contribution  to  the  science  of  Political  Economy 
that  has  recently  appeared." — Interior. 

Sociology. 

A  Treatise.  By  John  Bascom,  author  of  "Esthetics,** 
"  Comparative  Psychology,"  etc.     12°,  $1.50. 

"  Gives  a  wholesome  and  inspiring  word  on  all  the  living  social  questions  of 
the  day  ;  and  |fs  suggestions  as  to  how  the  social  life  of  man  may  be  made  purer 
and  truer  are  rich  with  the  finer  wisdom  of  the  time.  The  author  is  alwayi 
liberal  in  spirit,  generous  in  his  sympathies,  and  wise  in  his  knowledge." — Critic. 

A  General  Freight  and  Passenger  Post. 

A  Practical  Solution  of  the  Railroad  Problem.  By 
James  L.  Cowles.  Third  revised  edition,  with  ad- 
ditional material.     12°,  cloth,  $1.25  ;  paper,  socts. 

•*  The  book  eives  the  best  account  which  has  thus  farbesn  riven  in  English  of  , 
the  movement  for  a  reform  in  our  freieht  and  passenger-t-jiff  policy,  and  the 
best  arguments  in  favor  of  such  reform.^— Edmund  J.  James,  in  the  A  nnals  of 
Political  and  Social  Science. 

"  The  book  treats  in  a  very  interesting  and  somewhat  novel  way  of  an  ex- 
tremely difficult  subject  and  is  well  worth  careful  reading  by  all  students  of 
the  transportation  question."  —  From  letter  pf  Edw.  A.  Moseley,  Secretary  of 
the  Interstate  Commerce  Commission,  Washington,  D.C. 


Q.  P.  PUTNAM'S  SONS,  New  York  and  London 


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GAYLORO 

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